IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Okay. Great. So thank you, Rich Gelfond, CEO of IMAX for being here. We're happy to have you back. So Rich, you've managed your business extremely well throughout all the turbulence since 2020. What does the market not understand about IMAX?

A lot, but it's getting better. So it took us a long time to explain to the market that we weren't a North American exhibitor. And the reason we're not is because most of our revenues are not in North America, 2/3 of them are outside of North America. And the second is we're not an exhibitor. We're a technology platform. So we license our technology to about 1,800 theaters in 90 countries around the world and people pay us a license fee for doing that. So I'll address this question in different ways when we go throughout, but just to keep it brief. We don't sell concessions, we don't have leases. We don't have debt. We have none of the characteristics of what one would think about of an exhibition company. We have much more of the characteristics of a technology platform. And as a result, we're an asset-wide model. We performed relatively well during the pandemic. 2023 last year when exhibition revenues were down by about 30%. We were pretty flat with 2019, our revenues, and I'll get into this later. But we also have a much more diversified kind of revenue base than an exhibitor.

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 we're positioned extremely well. I think, Jessica, you look at me and partly I think I'm kidding and also partly say, unfortunately, you're right. But when you look at the media landscape, like nothing is working. I mean almost nothing is sort. But what's working is theatrical. I mean, starting a few months ago, theatrical is working very well. As I said in '23, IMAX's revenues were very similar to 2019, go through Disney, by way of example, right now. I mean, they're turning it around a little in streaming, but theme parks are struggling. But what's really working for them is their movie division, movies doing very well. And I think when you look at ‘25 and ‘26 and you look what's in backlog, and we'll talk to talk about that, it's extremely strong. So again, these mega companies coming out of it, they made their bet by saying, we're going to abandon our legacy business. Well, guess what, their legacy business works really well, at least the movie side of the business. And then the second part of my answer would be premium, which you mentioned. And our market share has gone up consistently since the pandemic and it's somewhere between 1/3 and 40% higher than it was pre-pandemic. Our percentage of the Box Office is constantly going up. And there's been kind of a fundamental switch in the movie business starting a couple of months ago with inside out. And I think there's a lot of momentum in that business.

All right. So you touched briefly on like what makes IMAX different from traditional theaters. But how it changes to their ecosystem potentially impact your business?

To the theater's ecosystem. So on a global basis, first of all, need to back up for a second. When people think of exhibitions, they think of North American exhibition. But again, as I said, 2/3 of our revenues are outside of the U.S. So exhibition is a growing business in a lot of parts of the world and particularly the developing world in the Middle East, in Saudi Arabia, there was no such thing as exhibition 5 years ago, and now it's a vibrant part of the economy. So I think you really have to regionalize it. So China has 80,000 screens, which is about double the amount in the U.S., growing pretty rapidly. Middle East growing pretty rapidly. Japan growing. And then Western Europe and the U.S., which are kind of more aged infrastructures are looking for new revenue sources. And they used to build new screens, they thought that was a good revenue source, but obviously, that's a warrant narrative, and that just isn't working. But putting IMAX in is a good incremental revenue source for them. So a lot of our clients have said, whereas we would have built more screens, we'd rather use our capital to put in premium specifically IMAX, it's a much better return on investment for us. So I mean, I think the pandemic obviously caused some damage to the balance sheets of some exhibitors, some places in the world, like Regal went bankrupt and AMC is restructuring its way out. But in general, they're much healthier than they've been. And I guess the best evidence I could give is year-to-date, we've signed 100 new IMAX systems which means we have a backlog of systems that we signed and installed, and 100 for us at this time of the year is pretty good. It's more in line with the pre-pandemic kind of numbers that they were. So it's either doing well or it's recovering.

I mean your market share has grown so maybe this is kind of a stupid question, but all we hear about is how like pressured consumers are, particularly at the low end. So is there any concern at all that the premium price for IMAX will have an impact, could make it less affordable?

I mean it's just been the opposite, not just IMAX, but the whole premium end has picked up market share over the last number of years. And I think part of that is the result of the pandemic, people when they go out, they want something different and something special. And it's not only true in the movie business, but look at the concert business and what's happened to ticket prices for concerts, you'll look at sporting events and what's happened. You'll look at out-of-home, live entertainment, or recorded entertainment everywhere. And I think it's partly a reaction to the pandemic because that people are not just going to sit on their couches, they're going to relish those kinds of things. And again, how kind of ticket price premium, it's about 40% or $5. So it's an affordable luxury. So if the economy takes a turn or almost all of our record year, I've been here a long time, so I've been here through 3 recessions in each of those we did well because maybe people will stop their trip to Milan or they'll stop going to a fancy restaurant. But going out and spending $5 extra is something they could still afford.

So if we go down that path of the kind of the demand for premium experience, are there other ways to further capitalize on this premium experience or ancillary monetization strategies that you guys are thinking about?

Yes. So I think the first monetization strategy exists within our universe, and that is we have a lot more leverage. So if you look at next year's film slate, we have 14 films that were shot with IMAX that are being shot with IMAX cameras. That are going to come out next year. So what that means is even higher market share for us, and it means even higher indexing on each movie. And these movies include the new Formula 1 movie starring Brad Pitt. They include Mission Impossible 8. They include 2 really high-end Marvel movies, Thunderbolts and Fantastic 4. They include Superman. They include How to Train Your Dragon, the new Paul Thomas Anderson movie. So the most we've ever had in a year is about half of that. So there's been a fundamental change in our business. And I must say, a lot of it had to do after the pandemic with premium, but it also had to do with the fact that OPPENHEIMER and June were shot with IMAX Commerce and shown in IMAX. And in both cases, we did 20% of the Box Office in the opening weeks I think for OPPENHEIMER, for both, we might have done close to that for the whole run. We're in less than 1% of the screens in the world. So if you're in any business in the IMAX ecosystem, you kind of need to be in the IMAX business. So going back to what I said about leverage and emphasizing that. So if you're a studio and you want to maximize your Box Office, you want to leverage off IMAX. If you are an exhibitor and you want to bring in incremental revenue in a higher ticket price, you want IMAX. If you're a well-known director and you really want to show your content in the best way possible and maximize your Box Office and I didn't go through the movie by movie next year, but for the Formula 1 movie is Joe Kosinski, who did Top Gun, Kevin Feige is overseeing the Marvel projects, Chris Macquarie and Tom Cruise in Mission. So these are top-tier directors and top-tier studios. As a matter of fact, I have a really good example of how the leverage has changed things. So Disney just released Alien Romulus. That movie wasn't filmed with IMAX cameras, but it was shown in IMAX theaters. And Disney really leaned into IMAX in that movie. So literally, if you looked at the poster, IMAX was this big, and Alien Romulus was this big. I was driving in LA. And I thought I saw an IMAX brand poster, but it turned out to be nailing because it was blocked out. I couldn't see it. And we did almost 15% of the domestic box office opening weekend, again, on less than 1% of the screens. So all the studios are really leaning in more. So what that means is we could get better terms on marketing from the studios. When we look at our long-term deals, we get paid by the studio and the exhibitor. We can get a better deal on that from when we do film prints, which we're doing in Joker, which is coming out in about a month, we could get different terms in our film prints. So throughout the ecosystem, whether it's exhibitors or studios or the use of cameras, we have much more leveraged. So that's the primary way just because that we benefit from the new world. But it's also helped us secure a lot of alternative content. So we did opening night of the Olympics with Universal NBC. We did in Taiwan and Hong Kong, we did the NBA finals, and we sold out in IMAX and that within the first hour that we put tickets on sale. We do live events around it. So we did a stop making sense from the talking a concert with a live event around it. So it enables us to get a lot more content as well and on more favorable terms. So I do think there'll be material financial benefits. And then I guess I left out the most obvious one is just the growth of the network since the numbers look so good for exhibitors who license our technology, it acts as a catalyst for more signings.

I have like so many follow-up questions, so don't change the topic yet. So I guess, first, you mentioned that the NBA finals on IMAX and China, Taiwan, and other content like the Olympics and talking heads. So what are the types of content do you think you could bring in that's not traditional films?

So the most successful content we've done so far has been foreign language content. So that's Japanese movie in Japan. As a matter fact, this weekend, in Korea, we did a Korean language music concert just in Korea. And on 18 screens, we did $1.7 million or $80,000 a screen. So I think there's no content that we can't do after our experience with the Universal and the Olympics, we're discussing other kinds of content with them that we can do. It's important to note, though, that from a financial point of view, that's very attractive because it increases capacity utilization, but it's never going to be a majority of our content, just like foreign language is 20%, I don't know, over the years, if we were really good at it, I'd say maybe it could be another 20%. The majority is still going to be film content, but it really opens up this capacity utilization point. And once we cover our fixed costs, everything falls to the bottom line. So our margins are extremely high, as you know, but in really good quarters where we have a lot of capacity utilization. Our gross margins are in the 40% range.

What's your average capacity utilization?

Capacity, I don't know. Do you know what it is? 20% plus on weekends.

So you still have plenty of...

Oh, yes. It's like Bill for the peak periods when a bad log but business.

Yes. So I just want to come back to some of the stuff you were saying about IMAX cameras. I have a bunch of questions. So how do films perform if they're -- in IMAX theaters if it shot with IMAX cameras versus not? Like is there a big difference in performance?

Usually, we do 20% more if it was filmed at IMAX cameras. There are the extreme examples, which I mentioned, Oppenheimer and Dune, which were multiples more. But on average, it's about 20% better.

Right. And then who makes the decision to shoot at IMAX? Is it the studio? Is it the director? And how do you -- like can you influence that? Because I know you have great relationships across the industry.

Yes. It depends on the movies, so I'll give you some examples. So the Formula 1 movie, which Jerry Bruckheimer is producing, and we've done a lot of movies with him over the years. And as I said, Joe Kosinski is directing, they really wanted to do it and they went to Apple, which is making the movie, and said, "We really want to do it." In this case, Apple negotiated with us before they even had a distribution partner, which is now Warner Bros. So that's an example of the talent really driving it in Apple supporting it. We have a great relationship, among others, with Warner and Warner will push a lot of its talent because they know the financial implications to use IMAX cameras. So Ryan Kugler is doing of IMAX film release in early 2025 using our film cameras and I believe that the idea originated with Warner and they went to him. So it depends but I'd say right now, it's probably mostly focused around the talent. I mean the results for Oppenheimer was so noticeable. I mean, obviously, it did close to $1 billion. People thought it was not at the beginning, a biopic about a physicist. It wasn't intuitive that it was going to be one of the biggest movies of the year. And then he went on, obviously, he and Emma won the Academy Award for it. So in a place that's always looking for new ways to attract audiences, that's really caught the attention of a lot of talent. So I'd say talent's driving it now. And then you look out even to 2026, there is Avengers coming in '26. There's a June project in '26 and there's a lot of Marvel things and other things going on. Star Wars in '26. So I think for most big projects, either the studios or the talent are looking around and investigating using IMAX technology.

So I think you said that the 14 films that are being shot with IMAX cameras for next year are double what it was in the past?

About.

And is there room for that to even accrue boe further?

Yes, it is. I mean during a year, probably you could do 25 films if you wanted to. But I should add to that, to put it in context, Jessica is, for next year, we're completely committed from May until the end of September. So we can't do another movie next year. That's how promising the slate is.

Right. Right. Well, on that, like what are you most excited about?

It's like asking you which of your children do you like the best. And you can't politically say that. But I would say I'm very excited about Formula 1. It star's Brad Pitt. Formula 1 is a global franchise Apple is putting a lot behind it. Warner is very committed to it. That is certainly one of them. At the end of next year, this is a small film called Avatar 3, and the first 2 have done over $2 billion. And for IMAX, we've done around $250 million in each of those. So how could you talk about a year without being really excited about that? And I'm excited about a lot of things, but I think I'll leave it at that, not to make more enemies.

Okay. And then I know you talked about your orders, but you didn't -- that's different from your install guidance, right? Of your installed guidance, I think, it went from 120 to 150 million, you increased the low end to 130 from 120. And that's above your 2023 level of 128. So can you talk through the drivers of that of the install?

Sure. So our network grows every year, and that's part of the reason for the growth. And it's not just the box office. It's also a function of how many theaters you have out there. So signings are what I was saying when you said orders that we are termed for the signing. So signing is -- so we just signed for 4 new theaters in Saudi Arabia. That goes into the backlog and then the backlog is now about 500 theaters in the world in addition to the 1,800 theaters that we have opened. So it takes typically about 3 years to run through the backlog. So it runs through the backlog and gets into the P&L through an install, which means you actually go out and install that theater. So the install guidance is more than it was last year, and we manage that very closely. I don't think we've ever missed it like we sharpened our pencils and we're up on it. I wanted to go back to something you asked a minute ago though, which you asked what I'm most excited about next year. I didn't get to log in for this year. So this year is going to be a lot better than people forecast at the beginning. And I think it's a function of the world returning to normal more quickly than I thought and most people have thought. And I think it's a function of the content that's been released mostly in the second half of this year. The first half of the year was still impacted by the strike. But tonight, you have Beetlejuice opening, which I think will, especially domestically, we'll have a very healthy opening. And then believing some out, you've got Joker with Lady Gaga and Joaquin Phoenix. I'm super excited about Gladiator. Some people on my team at an early peek at some of it, it's Ridley Scott. And I have just heard very good things. Then you have Wicke this year and I left out for next year, week and 2. And then you've got Moana, you have Mufasa coming out, you've got Venom. And this is just the last quarter plus of the year. So I think -- I know I've been surprised by how quickly things have come back. But when you look at '24 and then what's already announced for '25 and '26, I have a great deal of confidence that the industry as a whole is looking pretty good.

So just on that note, because you mentioned a lot of movies. Just when everything seems to be coming like out of the pandemic getting back to normal, we had those 2 strikes last year, and that kind of shut everything down for, I don't know, 9 months or whatever it was. Is this slate at normalized levels? And if not, when will it be? And has the output like -- is there anything structurally different now?

Yes. So you have to separate it out. For exhibitors, which we're not, that have multiplexes and need to show lots of movies and sell lots of popcorn, there are less releases than there used to be. And also, there is certainly less mid-level kinds of releases, the $50 million budget kinds of things that keep screens 15 through 20 fall all the time. For IMAX, because we show blockbuster movies at our end of the market, and I think this is the fourth time I've said it, '23 was already equivalent to 2019 for us. So at that end of the market, there's nothing structural. And in fact, the industry has moved to more blockbusters and away from other kinds of films. And I think even the streamers like Apple and Amazon, have come into that space and wanted to release movies theatrically. First, which I'll talk about here, Jess, is we've done some research, which is not fully baked, but it's mostly baked which is we tested how an IMAX release affects people's wanting to see it in streaming because let's face it, the world is looking at content differently, not just its first window, but it's overall window. And we hired a prominent research firm to take posters and put IMAX on them or not on them and then to say, would you be interested in seeing this in streaming? And the numbers were crazy. I mean that's why we're doing more testing, but it was a really significant percentage north of like to see the movie and 30% to see it in streaming, said they were more interested in seeing it just based on IMAX being in the poster. And IMAX has increasingly become kind of a curator of movies. So people say, "Well, is it an IMAX? If it's an IMAX, it's like the good housekeeping seal of approval." So we'll be talking more about that. But I even look at the data, I don't know -- we haven't talked about this much, but Top Gun was the #1 theatrical movie, I think, 2 years ago, and is also the #1 streaming movie. And I think the same might have been true with Barbie last year. So I think a strong theatrical run, especially with the inclusion of IMAX, helps the value of the whole content chain, and going back to an earlier part of our discussion, I think it also affects where we sit in the ecosystem and the kinds of leverage we have and the kinds of commercial terms we can get.

Fine. Okay. So let's switch gears and go to outside the U.S. or to China specifically. And the recent performance in China suggests there's a real demand for your technology and offerings in the region. But it's a complex market. What's your view on how Hollywood movies play in that region? Or how successful they can be.

So it used to play really well, then they played really poorly. And this year has been a mixed bag at best, Godzilla and Allianz versus Romulus last weekend, the last couple of weeks have performed really well. As a matter of fact, we did more box office on Allianz in China than we did in North America. But it's a market somewhat in transition. Before the Party Congress, China was very restrictive in terms of what types of films they would let be imported. And they didn't really give good dates and so it's very up and down. But this year, it seems to have been much more consistent. So Deadpool versus Wolverine got into China. And if you had told me a movie with 100 FBM is getting into China, I would have said there was a 0 chance for that. So I think they're pretty focused in China on increasing their overall box office and they're kind of coming out of this transition period. So I think '24 is still a little caught in that period, but I believe '25 with the slate I described plus a lot of what's going on in China will start up the curve.

Interesting. And then can you talk about the benefits of some of the recent corporate actions that you've taken in China? In 2023, you announced plans to acquire 100% ownership of IMAX China. So can you give us an update of...

Yes. So we own 70% of it now. There were some good financial reasons to do that. But we needed 90% of the 30% outstanding, which meant 2.7% of the outstanding could block it. We got the vast majority of the shares tendered, and we did it because it was accretive and it cleaned up some intercompany issues for us. In China, you need the approval of the Hong Kong Stock Exchange to do intercompany things. So it wasn't approved, and it was at a significant premium. But what we did was very much a workaround. So the reasons we really needed to do it, we accomplished without having to take the company private. So I still might do it or might not do it, but there's much less benefit there in doing it than there was. So we're still undecided. And I guess adding something snarky, which I shouldn't -- it's like we offered a 50% premium. The activists thought they were clever and thought they could game us. So we figured out a way to accomplish the results and they thought they put a gun to our head. So there's no gun to our head. And if it makes sense, we'll do it if it's not. It's a great company, but the stock is highly illiquid, and good luck to them.

All right. So you mentioned that IMAX generates the majority of revenue outside the U.S. Could you just give us like kind of a picture of how much runway you think is left in international markets, where you're underpenetrated, and what markets you think are the most attractive right now?

So we're about 50% penetrated globally of our addressable market. In the rest of the world outside the U.S., we're about 35% penetrated, which means we could more than double our network. As I said, we have 500 theaters in backlog, 1,800 open. So those are ones that are signed, and we know we're going to grow into. As I said also, we signed 100 this year. The areas of the world that I consider most promising right now, I think Japan, we haven't kind of -- the way we scoped it out, we could have more than 100 theaters there, and we have 50 now. In Saudi Arabia, we have 15 open and we can do like 75 there. I think Western Europe has great potential. We only have 11 theaters in Germany and believe it or not, we have 11 in Ecuador. So Ecuador may be on the high end for a small country, but we can do a lot more there. France, our theaters are very successful there. LatAm is very underpenetrated. India, we only have about 40 theaters open, and we have an addressable market of about 150. And then we keep increasing the addressable market. So we started in China, we thought we could do 90 theaters, and we have 800 right now. So even though I said 35% in rest of the world, I think we could do more than that eventually.

Right. And then there are periods of time where certain markets grow faster than others. Is there any particular market outside the U.S. that you see as more attractive than others?

Right now, Southeast Asia has really been on fire. So we've done a deal this year in Malaysia, Philippines, Indonesia, Vietnam. And I think it's because those economies and the demographics are rising so quickly. So after you can afford food and shelter entertainment becomes a big thing. So those are really very much doing well.

And how much growth is driven by the kind of high-profile films that we were talking about earlier versus regional local language films in specific markets?

I think it depends. I think it really has to be a mix, so in India, for example, we have a lot more local-language Indian content than we used to have. And as we pivoted to more of that, the theater sales went up significantly in the footprint expanded. I just told you this story about Korea and this crazy weekend we had. So I think it's a little bit of a mix of where that happens. And it depends. And we did a local language Indonesian film, which drew some interest. Japan, we've been really killing it with anime, and we've been killing it not only with anime in Japan, but we've exported that anime to the U.S. Even in China, a lot of -- I think, might mess it up, but a film called Dragon Ball, I think, did more in China than it did in Japan, anime. So that's another thing we're doing. It's not just local language in the local market, but taking the local language. I know Netflix has done very well with that in the in-home side of the business, and that's been extremely successful for us is doing local language film. As I said, it's now about 20%. I think we could do a lot more of it. Just an anecdote in Japan. You've probably heard of Misaka, which is the most famous anime director in Japan. And he came out with a new film last year, and we said we'd like to do it in IMAX. And he said, "I've been doing things a certain way for my entire career is very, very accomplished guy." But our team kept pushing and pushing and we specked it out, and we showed them what it looked like in IMAX. And eventually, he did it in IMAX, and it did well in Japan. It did well in the U.S. also. So all of these things, even though we're a global brand, they're like local battles. So I just want to tell you a funny anecdote because I know you live in the Hamptons, it's like I do. So they're building -- we're putting up an IMAX theater in South Hampton. And people say to me, "I don't know what you do. I don't know what IMAX is." But since they found out, it's going in Southampton, all these people stop me and they go, "Wow, does an IMAX theater going up? Isn't that a big deal?" And again, I fight myself, I don't want to say, well, it's 1,801, but the local aspect of it is such -- it's like they're the first ones and they're like the only ones. And by the way, I expect to get calls about asking for free tickets and taking the popcorn off the seats. But as a reminder, we don't operate anything. It's a license.

That's historic. How do you think about allocating capital across regions, especially in cases where you're doing revenue-sharing arrangements and putting up the capital?

So it really depends on the market. So for example, we had a very good presence in Russia before the sanctions happened, we had like 60 theaters, but we didn't put up any capital. We sold all of them. So I feel terribly that we can't operate them, but obviously, understand the geopolitical situation, but we had no money stuck over there. So it really depends on what the economy is. It depends on the potential of the location also. So if you're putting a theater at Times Square and someone wanted to share the upside and joint venture, we'd be really happy to do that. But if it was a theater in some small town that was really spread out in a rural area, we would rather minimize our risk there.

Right. I'm like watching the clock, I'm going to go to the last 2 questions. So the first is the technology question. There's just been so much innovation at IMAX, but would they -- I guess with the advent of the AI, can you talk about how you're using some of the newer technologies? What you think is coming? Obviously, you have like a very strong brand, a very strong reputation. So like you can't -- which obviously not going to damage that. But what do you think of technological innovation using AI? And how would you plan on integrating that within the business?

So we're very actively trying to integrate it. First of all, on the cost side and the operations side, and we're quite deep in understanding it. So there are a lot of ways that we can minimize costs, I'll give you just one example. We monitor every one of our theaters in the world in real-time. So if the sound is too low in Beijing, we call them and tell them to turn it up. But we're wired to do that right now. But we get tons of data that we really can analyze because there's just too much of it. But one of the things we can do is predictive maintenance. So we can figure out if something is going to break in Malaysia and when it will and will help us monitor our cost of maintenance and help us manage our inventory much better. And I could give you 20 more examples, but there are lots of things. Also on the content side, obviously, AI is going to play a role. One of the things we do is we blow up images. We make the images look better and image quality. And certainly, there are tools that could help us sharpen the image even better and maybe lower the cost than we're doing it now. I know there's been a big debate about where creators fit into the whole thing. And we work with a lot of AI things. I've seen a lot of the tools, directors are using now. And I think over time, just the way the synthesizer people got paid for their music, they'll be a very fair solution. So people will get paid for their talents, but I do think AI ultimately is going to have a dramatically positive effect on IMAX and on the industry.

Right. So I guess, finishing up, you laid out a pretty solid growth plan and runway for success. But is there anything -- I guess anything that we haven't covered and what you might be the most excited about is a driver over the next couple of years?

I'd say the combination of factors, the integration, one of the problems with doing things like this is you talk about them in silos, rather than you integrate them as a whole. But you put together a bigger theater network. You put together increased market share, which has been happening year-over-year. You put together new forms of alternative content, you put together more films used filming with our content, increase in local language film, it all feels pretty good.

Not only have a lot of drivers, and you've come through a lot of challenges, not you or the industry, pandemic through the strikes.

Yes. And because we're in 90 countries during COVID, we had 90 rolling lockdowns in addition to no content because it wasn't being made during that period. So I'm really happy to see that behind us and to look in the next couple of years.

Great. Thank you so much for coming. We welcome you back. Thank you.