Lack of Blockbusters Holds Back IMAX

A slow start to the year at the box office left IMAX (NYSE: IMAX  ) without any major hits in the first quarter, which hurt financial results. Without any major big box office hits this year, the company generated a smaller take on ticket sales, which is where it generates most of its revenue. To put the year into perspective, The Lego Movie's $252 million take would have been the ninth best film a year ago. The first quarter is normally slow, but 2014 is abnormally weak for a company like IMAX.

Because IMAX generates most of its revenue off the big blockbuster action movies, it's amazing that the company's revenue was down only 3%, to $48.2 million, in the first quarter. Services and rentals, which are tied to box office success, were actually up slightly in the quarter, in large part because of an expanded network of theaters. 

IMAX has finally learned what films work in its format, but 2014 is a down year for those action films.

IMAX also squeaked out a profit of $579,000, which was down from $2.9 million a year ago, when the company posted a $2.2 million gain on curtailment of post-retirement benefits plans. That's what's most concerning for investors today, because the per-share profit of $0.01 was $0.04 below expectations.

The challenge for the rest of this year will be simply keeping up with a year ago. Only three films are booked beyond June, and they aren't the same easy winners as last year, when The Hunger Games: Catching Fire and Iron Man 3 hit theaters. By comparison, this year, IMAX will be counting on Transformers: Age of Extinction, Guardians of the Galaxy, and The Hobbit: There and Back Again to fill the blockbuster role.

Primed for future success?
Long-term, IMAX is still setting up for success, even if this year isn't going to be great for investors. IMAX's network of theaters is growing, and potential blockbuster hits are already being signed up.

Ten new theaters were built in the first quarter, and backlog jumped from 283 theaters a year ago to 431 on March 31 of this year. Theater expansion leverages the cost that goes into converting a film into IMAX's format, so the larger network will be good for earnings.

On the content side, IMAX signed a deal with Disney (NYSE: DIS  ) to show some of the company's biggest upcoming movies in IMAX. Captain America: The Winter Soldier is already in theaters, and Maleficent and Guardians of the Galaxy will be coming later this year.

The bigger win for both IMAX and Disney will come in 2015 when Marvel's Avengers: Age of Ultron and Star Wars: Episode VII will be released. Notice that Disney's Marvel and Lucasfilm studios are working with IMAX, but Pixar is excluded. After years of experimenting with what works in large-screen theaters, studios have learned that children's films don't work well in premium theaters like IMAX, while action films perform exceedingly well. This will allow IMAX to show high-value releases for longer instead of switching out films every week.

What to expect from IMAX
The year 2014 is going to be a rough one for IMAX, even if management can hit the market's $0.94-per-share earnings estimate. The film lineup just doesn't work well for IMAX.

But looking forward to 2015 and beyond, when more Disney Marvel films will be released, and even further out when the sequels to Avatar come out, I think there will be a big jump in profit. That's what investors will want to hold on for.

Who can win the war for your living room?
IMAX and Disney are at the center of a changing media environment where content and experience are key. In fact, for the winners of this battle, there's $2.2 trillion out there to be had. Three companies are poised to benefit more than others. Click here for their names. Hint: They're not Netflix, Google, and Apple.


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