IMAX CEO: Movie theater business is 'smoking' following pandemic

batuhan toker/iStock via Getty Images

IMAX CEO Richard Gelfond characterized the movie theater business as "smoking," thanks to a strong slate of summer movies.

Speaking to CNBC on Monday, the head of theater technology firm IMAX (NYSE:IMAX) explained that the company remains cash-flow positive despite recent COVID shutdowns in China, one of its biggest markets.

"We're only down 5% from 2019, which was our best year ever," Gelfond said.

Last week, IMAX released a mixed quarterly report, missing earnings expectations but beating forecasts on the top line. Share rose immediately after the earnings release but lost ground from there, eventually closing Friday with a decline of 3.5%.

For 2022 as a whole, IMAX has declined about 11%. While down for the year, the stock has still outperformed the broader market and many of its peers in the movie theater business. For example, one-time meme darling AMC (AMC) has fallen 45% in 2022, while National CineMedia (NCMI) has dropped 53%.

However, IMAX has underperformed Cinemark Holdings (CNK) and The Marcus Corp. (MCS), both of which have retreated less than 10% during the year so far.

On China, the IMAX CEO pointed to this past weekend as a possible "turning point" for that market. With COVID restrictions loosened, the market saw its best summer weekend since September 2019, Gelfond explained.

Looking longer-term, Gelfond noted that industry dynamics are likely going to support the company's focus on an enhanced theater experience. He noted that so far this summer, IMAX has benefited from hits like Top Gun: Maverick and the latest entries in the Marvel franchise.

"We're in the blockbuster business ... Fortunately, the whole business, that's the direction it's going. So a lot of the smaller, mid-level movies, are moving over to the streaming services. But the big ones, it's kind of like murderer's row," he said.

For a cautious look at IMAX's prospects, read a deep dive from Seeking Alpha contributor Bold Investments, who says the company is "recovering, not growing."

Comments

[TommyIrish]

"smoking"

A year ago consensus 2022 EPS estimates was a buck, by now reduced to a meager 40 cents and who knows if they can even break even when all is said and done.

Remarkably their $17 stock price has not budged.

A smoldering ruin may be coming to a screen near you before you know...

[thumbsoup]

IMax experience might become the last reason standing to go out to see a movie. Ticket price is $20, which gets you a month of a streaming service, although its much cheaper than any live event run by Ticketmaster.

[Jamie Samans]

@thumbsoup I paid $20 for an old-fashioned at the Blind Ox in Honolulu. For $20, I could have gotten a fifth of whiskey at the liquor store down the street from the Blind Ox. The experiences are different.

Individual preferences aside, though, you may be interested in my response below to Kansas King, in which I lay out what I think may soon happen for the cinema sector and why.

[Jamie Samans]

"Smoking" is a poorly chosen word. He means "smoking hot," but "smoking" is always what charred ruins do when the fire is finally put out. At a time when there's uncertainty regarding the viability of cinema -- not in economic terms, because the recovery to 80-90% of pre-pandemic levels is already apparent, but psychologically, because a whole lot of people joined the hype of streaming during the pandemic and are still struggling to accept that it's not able to deliver comparable returns -- it would be better to avoid double-meaning expressions.

[Kansas King]

Movie theaters are still doing well based on my anecdotal personal observations. The problem is that they don't control their own destiny. I used to watch 2 or 3 movies a month at a theater a few years ago. Now, I probably watch one movie a quarter. It's not that movie theaters are better or worse, it's just there isn't much to watch. It's not like I'm watching more on a streaming service either, it's just that I'm watching less movies in general. It seems most of Hollywood is focusing on streaming with a grand total of only five or six big releases this year coming to theaters.

I think one of the biggest weaknesses for movie theaters over the next few years will likely be continued weakness in the super hero (Marvel) segment. Marvel used to be able to pump out new movies every four to six months that everyone would go watch but that's not the case anymore. The genre is getting a little tired and it seems Disney is now directionless with the franchise. This isn't even counting the effects of Disney pushing their content towards their streaming service.

I won't say theaters are dead but I think we've pushed past their golden era. I personally like movie theaters and hope studios re-embrace the value that they offer.

[Jamie Samans]

@Kansas King good insights, and I agree. However, there's a twist that I hadn't fully appreciated until recently: the Paramount decrees, which have basically kept studios from owning theaters since the 1950s, end this month. They didn't technically bind all of the studios, it was always understood that it would be risky for a studio to have more than a token theater presence. After this month, no longer.
Now, two reasons this matters, both of which I've only recently come to understand. The first is that the Paramount decrees followed a period of about 30 years during which the cinema sector was dominated by the studios, which used them to promote their own content on favorable terms (each its own, sometimes exclusively) -- and that this period of dominance began after the 1918 flu pandemic, from which the independent theaters emerged very weakened and as willing targets for acquisition. This is very similar to the conditions surrounding the industry today, you'll notice.

The second reason it matters is that there are three major streaming players that have both the means and a clear reason to consider acquiring a theater chain: Disney, Amazon, and Netflix. Each has an entirely different reason but if one does, the other two will be playing catch-up. More on that in a moment. First, the reasons (as I see them).

Disney builds experiences. It has taken the Disney experience and extended it to cruises, standalone resorts, ice exhibitions, live-action rehashes of its animated movies, and themed events. It has always monetized its content to maximum effect by using limited access (e.g. the Vault) and massive marketing to make people want to see it, rent it, buy it, and live it. Not everything it makes is a huge success, but many are, and whatever is gets broad exposure. Being able to offer a Disney theater experience would be one more way to drive hype to All Things Disney.

Amazon is an ecosystem. From its inception, Amazon Prime has been about keeping people in the ecosystem. It doesn't matter if a given person is actually watching Prime Video or listening to Prime Music. What matters is that Prime offers an extensive value proposition that is always being sweetened, so that you never, ever really consider leaving Amazon's ecosystem. Being able to offer theater access on favorable terms -- perhaps free Amazon movies, perhaps $1 admission, perhaps private parties for anything Amazon Prime offers at a nominal fee -- would be one more way to make sure that Amazon remains your Sole Source for Everything.

Netflix is the longest-established streaming provider and is fighting a sense that it is in decline. It made its name offering existing content through a platform. Its platform has now been copied and the content it used to show is either more expensive to obtain or denied to it entirely by the owners that are trying to make their own platforms more appealing. It's therefore had to make a big pivot to being a producer of its own content, which is much more expensive. When that content debuts to Netflix streaming, it returns nothing beyond keeping people from leaving. If it owned theaters, Netflix could make that content available on favorable terms *for its members* -- maybe free, maybe $1 -- and would have a new pathway to signing up people who may or may not even end up going to the theaters for most showings. For Netflix, theaters would be the reason Netflix is Worth Keeping.

That covers the Big Three. The other streaming players -- HBO Max, Paramount, Apple TV -- don't matter. They are second-tier players and know it, and they need theaters regardless. They're already discovering their own version of the problem Netflix is facing, but with lower subscriber counts and a harder time making anyone care.

So, that's the "why" for the Big Three, and if one of the Big Three moves on buying a theater, my bet is that the purchase would be Cinemark. That's because Cinemark is historically profitable and appears to be resuming that profitability, and its debt is relatively low, making the enterprise valuation of an acquisition (equity plus liability) very affordable for any of the Big Three. Cinemark's Movie Club program is also the easiest to adopt (especially for Amazon, which could just absorb it as the Prime benefit). Then what happens?

Some might say, one of the others would buy AMC, but I don't think so. AMC's enterprise valuation is much higher because of its debt, and its shareholders are primarily retail owners who are not inclined to sell; some of them are still talking about $1000 a share or some such, and plenty are wishing for a return to $80. It's beyond belief that any company would pursue such pricing, so I believe that AMC would simply languish until it enters bankruptcy, at which point all three (not just the two who didn't get Cinemark) would buy up pieces of it. That may be 12-18 months away or even further out. In the meantime, the one that bought Cinemark would have a huge head start and its newly acquired cinemas would have a huge advantage, unencumbered by debt relative to the value of its backer.

All this is why I think there is very good reason to expect post-Paramount bids for Cinemark, with some degree of a bidding war between the Big Three to account for the considerable head start that the winner would have over the other two. In the wake of that, the whole narrative involving the cinemas will change to be the New Big Thing for the stagnant world of streaming, the Game Changer that will make it all work. True or false doesn't matter. Just as it didn't matter that streaming offered lower revenues at best and was in some cases a straight money loser, the narrative will travel well.

That's my prediction based on what I understand of the situation, and I'm positioning my own holdings with that in mind. We'll see what happens.

[thumbsoup]

@Jamie Samans IMAX seems more like a Disney event. Could add amusement park like experiences, tie ins to Disneyworld.

[thumbsoup]

@Jamie Samans Good thought about the rule expiration. And yeah between AMC and Cinemark I'm guessing you are right.

However, the standard location for Cinemark and AMC is multi-plex, 8+ screens. Not like 100 years ago. Any given weekend, neither Netflix, Amazon nor Disney can cover half those screens in big new movies. So, if your right, I would expect licensing deals to show movies from other producers/owners.

[OverTheHorizon]

Big investment required for new IMAX theater. Rising global interest rates may make it hard to pencil.

[Jamie Samans]

@OverTheHorizon good point. On the other hand, recovery is likely based on existing venues. Expansion can come later. Also, it's worth keeping in mind that almost the entire existing industry was built under interest rates quite a bit higher than what we have today. Businesses will need to rebaseline on higher rates, for sure. Those rates are the norm, though.

[OverTheHorizon]

@Jamie Samans makes sense.