by Elliot Turner
Shares of IMAX (NASDAQ: IMAX) are rallied yesterday following the release of the company's 3rd quarter earnings report. The last time I spoke about the company was a rebuttal to a New York Times story which argued that 3-D was encountering resistance from Hollywood ,and following this earnings release it's time to update the thesis on this company.
For the quarter, the company reported $0.15 cents of non-GAAP EPS ($0.10 GAAP), ahead of analyst estimates of $0.10 per share, on revenues of $51.1 million, ahead of the $49 million estimate. The company announced a backlog of 257 theater signings, with 100 new theaters signed on during this past quarter alone. Gross margins checked in at 50.8%, above the 42.8% last year.
The IMAX story is about much more than 3-D at this point. At the heart of the story is the nature of entertainment today. On one end we have had the rapid advancement of home entertainment with the ubiquity of high definition television and surround sound systems, and on the other we have rapidly appreciating costs for all forms of public entertainment ranging from movie theater to concert to sports tickets.
About two years ago, I went to see Beowulf in Imax 3-D and could not believe how thoroughly enjoyable the experience was for such a terrible movie (and I mean TERRIBLE). From the moment the first preview for a 3-D U2 concert brought Bono into the middle of the audience, I felt an exhilarating rush. In the past I went to the plenty of movies in the theater, but since I put together my own pretty good sound system with a high definition TV, I largely stayed away. To pay $12 to see a movie when I could just wait an extra month, tap into my Netflix (NASDAQ: NFLX) account,and have a very similar experience to the theater on my own couch, for a fraction of the cost, did not give me enough incentive to rush to the movies.
Additionally, movies themselves of late had seemed stale, with recycled plots and canned special effects. 3-D offered something totally different. For just $2 more than a regular movie and about $50 less than even a far away ticket to a sporting event, I was able to experience a public form of entertainment that offered great value compared to the spectrum of available options. Not only was it great value, but it was something unique, exciting and totally new. I was instantly hooked and my interest in IMAX was piqued.
Further bolstering the case for IMAX is the fact that many in Generation-Y use the terms IMAX and 3-D interchangeably when referring to movies, thus making the brand a stand-out despite emerging competition from the likes of RealD (NYSE: RLD). This type of brand recognition has immense value in its own right, and is exactly the type of thing that can transform one player from a niche beneficiary to a major force.
As for the company itself, pre-Avatar the financials were rather crummy. They were loaded with debt, had little cash and suffered from negative earnings. The fundamental catalyst that Avatar provided in changing the game altogether sparked a balance sheet transition in which the company paid down a significant portion of its debt and started building a cash position. This greatly enhances the company's profit margins, cheapens its cost of capital, and provides a catalyst in and of itself for an increased stock price.
Where are we now?
Following Thursday’s earnings release we have way more confirmation in the IMAX thesis. As 3-D continues to increase in prominence, so too has come the proliferation of the 3-D theater. Even better, as 3-D theaters grow in abundance, 2-D movies in digital display are becoming increasingly popular. IMAX CEO Richard Gelfond offered the following observation in the conference call: “The performance of Inception demonstrated how our fans seek out IMAX because it is the best way to experience a movie, whether in 2D or 3D.” Inception took in over $50 million alone and was the lead revenue generator for IMAX in box offices despite not even being a 3-D movie! The success of Inception highlights the fact that moviegoers are looking for something more than just an in-theater experience.
As the company continues to add new theaters and increase its backlog, margin growth has been --and will continue to-- accelerate. Since IMAX signs deals with movie theaters, it doesn’t have to spend out of pocket to maintain each additional location. It is an incredibly powerful business model through which the company can leverage its growth into increased profits and increased returns to its shareholders. With a cleaned up balance sheet and less money headed to bank interest, more of the box office receipts translate directly into bottom line revenues.
Disclosure: Long IMAX and NFLX