Lights, Camera, Traction

IMAX (Nasdaq: IMAX  ) was one of yesterday's few market winners, climbing 9% as most growth stocks went down for the count.

What propelled this big-screen salmon upstream against such a vicious current? Perhaps the company's 20-minute presentation at the ICR XChange Conference got investors buzzing.

The details of IMAX's new business model can be pretty inspiring to hear, especially if you feared that the company was death-pool fodder after it failed to secure an adequate buyout offer last year. Combined with an accounting scandal and faltering financials, you had the perfect recipe for apathy.

A star is reborn
What's so exciting about IMAX's new joint-venture initiative with domestic multiplex operators? It's best to compare the old model to the new one.

Until now, IMAX has simply sold most of its bigger-than-life branded projection systems, charging exhibitors an average of $1.3 million for each installation. IMAX also collects either $50,000 or 3% of the gross box office receipts each year.

Then comes the celluloid. IMAX foots the one-time, $1.5 million bill to remaster each Hollywood release for its higher-quality platform. The studios then pay $2 million to $4 million to produce 100 reels (they average $20,000 for a traditional reel and $40,000 for a 3-D reel).

The exhibitor and the movie studio wind up roughly splitting the box-office receipts. IMAX takes a 25% cut from the studio (or 12.5% of the total box office).

If I lost you in the numbers, you only need to know that IMAX makes a good chunk of change up front, but the revenue stream gets a bit light after that. The high up-front investment has also limited IMAX's growth. The company is nearly 40 years old, but there are only roughly 300 IMAX screens worldwide.

But let's get into the 100-unit joint venture deal that IMAX has now signed with AMC. These are digital projection systems, so the studios are already tickled to save the $2 million to $4 million per flick they had to pay in printing costs. IMAX's conversion costs are also slightly lower.

Instead of coming up with a seven-figure initial investment, AMC is only paying $150,000 to retrofit its multiplexes to house the new IMAX digital system. IMAX is footing the bill for the digital projection system, roughly a $500,000 investment.

With a slate of 10 IMAX theatrical releases a year, the company expects to draw nearly 80,000 movie watchers per screen at almost $10 a pop. The exhibitor splits its 50% box office gross with IMAX, which at $200,000 per year is a 38% rate of return on IMAX's screen investment. When you factor in the cut it will also be getting from the studios, the return bloats to around 60% (though that doesn't account for the prorated cost of IMAX remastering all of the flicks).

It's pretty sweet, isn't it? IMAX should recoup its investment within two and a half years. And given the flexibility of the digital projection format, in a couple of years, the joint venture may be able to charge a pretty premium for screening everything from the Super Bowl to a live Van Halen concert to The Oscars.

Something new, something old
IMAX expects to continue to service overseas markets the old-fashioned way. Many of its bigger contracts have come in from abroad lately, including a 10-screen order for China earlier this month.

Crucially, IMAX now has the carrots to draw in both nervous stateside theater operators and movie studios alike. Time Warner (NYSE: TWX  ) and Sony (NYSE: SNE  ) have been particularly active in offering up their most promising blockbusters. However, now that IMAX is going digital, even DreamWorks Animation (NYSE: DWA  ) is hopping on the bandwagon, with this summer's release of Kung Fu Panda.

Everything's finally coming together for IMAX -- barring one financial concern. IMAX will have to tap its $30 million credit line with Wachovia (NYSE: WB  ) to bankroll its side of the bargain with the AMC deal, and the company is already pretty leveraged to begin with.

In other words, now more than ever, IMAX could put itself and its far more attractive business model on the block, and fall into the arms of a studio-neutral parent with the money to aggressively expand this win-win-win model.

The more screens it fills, the more money IMAX can make in box-office slivers. Installations may be lumpy, but the growing box-office receipts have been consistent.

Year

IMAX Box Office

2002

$8.0 million

2003

$22.4 million

2004

$51.7 million

2005

$78.3 million

2006

$88.1 million

2007

$145.0 million

The AMC deal does have certain territorial restrictions, so IMAX can't team up with rivals like Regal (NYSE: RGC  ) or Cinemark (NYSE: CNK  ) to build another IMAX on the other side of town.

But the speedy return of its invested capital -- if the model executes as planned -- may eliminate the need to seek out a fat-cat suitor. IMAX still has a shot to thrive as a stand-alone investment. I'm merely suggesting that the company should remain open to offers.

It took nearly 40 years for IMAX to get it right. Let's see whether the company can make up for that over the next 40 years.

For more silver-screen gold:


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