IMAX Shows That Theaters Aren't Dead
It's been a tough year for investors in the theater business. The rapid adoption of streaming, escalating ticket prices, and a weak slate of films last summer were enough to make movie-goers stay home, causing a wholesale sell-off in exhibition companies. IMAX Corporation (NYSE: IMAX), the leading provider of premium large-format screens, wasn't immune to the fear-driven selling, losing 26% of its value in 2017.
IMAX took steps last year to bolster its results by slashing costs and laying off roughly 14% of its workforce, or approximately 100 employees, and initiated a reorganization that it estimated would result in $20 million in savings annually. Those initiatives began to take hold last quarter, as the company reported a reduction in overall expenses.
Going into IMAX's fourth-quarter and full-year financial results, investors were looking for signs that the long drought for theaters had come to an end and that the company's cost-cutting measures were bearing fruit. IMAX delivered, but investors wanted more.
iMAX continues its evolution. Image source: IMAX.
Bucking the industry trend
IMAX reported revenue of $125.6 million for the fourth quarter, an increase of 17% year over year, vaulting past analysts' consensus estimates of $118.8 million. Net income of $4.8 million included charges related to recently enacted U.S. tax legislation, as well as those related to the announced reorganization. Excluding those one-time adjustments, net income was $21.8 million, or $0.34 per share, up 55% year over year, meeting analysts' expectations.
Metric | Q4 17 | Q4 16 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $125.6 million | $106.9 million | 17% |
Adjusted net income | $21.8 million | $14.5 million | 50% |
Adjusted earnings per share | $0.34 | $0.22 | 55% |
Data from SEC filings. Chart by author.
The company was quick to point out that its global box office of $278 million increased 13% over the prior-year quarter. IMAX domestic ticket sales also shined, increasing 17% in the second half of 2017, compared to an industry decline of 6%.
Theater owners continue to invest in IMAX technology to lure consumers off their couches. IMAX signed agreements for 23 new theaters last quarter, bringing the total backlog to 499. The company accelerated its installations at the end of last year to prepare for a full slate of movies in 2018. It installed IMAX in 70 locations during the quarter, bringing the network to 1,370 systems, up from 1,215 in the prior-year quarter.
IMAX saw growth in both major business segments.
Network business, which includes revenue from recurring sources, grew to $53.8 million, up 13% year over year. Within the segment, digital remastering came in at $31.7 million, up 15% over the prior-year quarter, while joint revenue-sharing arrangements grew 12% year over year to $20.7 million.
The theater business segment, which includes sales of systems and theater maintenance and tends to produce lumpy results, grew to $55.5 million, up 5% over the prior-year quarter.
The company's cost-cutting measures have started to gain traction. Gross margins remained steady at 48% of revenue, while expenses came in at 28% of revenue, compared to 34% in the prior-year quarter. Unfortunately, the one-time tax charges more than offset any expense reductions.
IMAX CEO Rich Gelfond said, "We saw tangible improvements to box office performance and operating leverage in the second half last year, largely the result of our implementing several initiatives aimed at refining our programming strategy and containing costs."
The future on the big screen
Investors seemed disappointed with the results, and shares fell more than 10% as of this writing. In an interview with CNBC, Gelfond reminded investors that IMAX is a global company, and while ticket sales in North America are essentially flat, they are growing in the rest of the world, which accounts for about two-thirds of the company's sales.
IMAX had its second-best weekend ever two weeks ago with the release of Disney's (NYSE: DIS) Black Panther, which broke records, achieving more than $50 million in IMAX box office worldwide in its first 10 days of release. The company also achieved record results in China during the recent Chinese New Year holidays.
The company continues to tweak its business model to maximize revenue while working to control costs.
While IMAX insists that it has a different business model than its movie theater brethren, it still appears to be beholden to a strong slate of movies. Adjusting its business model and reducing expenses will likely improve its overall results -- but blockbusters will continue to pay the bills.
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Danny Vena owns shares of IMAX and Walt Disney and has the following options: long January 2019 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends IMAX and Walt Disney. The Motley Fool has a disclosure policy.
