Big-screen theater specialist IMAX (NYSE:IMAX) counts on having plenty of quality entertainment to deliver to its patrons, and that can leave the company vulnerable to the ups and downs of Hollywood and other content providers. That hasn't been any problem at all for IMAX recently, given the dramatic success of blockbusters like the latest Star Wars installment. Coming into Wednesday's second-quarter financial report, though, IMAX investors were prepared for a downturn in the company's fortunes. IMAX managed to avoid the worst of that drop-off, but it will still have to work hard for the rest of the year to live up to 2015's results.
Let's look more closely at how IMAX did and whether it can keep up the pace in future quarters.
IMAX throttles down
IMAX's second-quarter results weren't as bad as many had feared, but they still represented substantial declines from year-ago levels. Revenue fell 14% to $91.7 million, outpacing the 19% drop most investors had expected the company to post. Adjusted net income fell by more than half, to $12.1 million, but that worked out to adjusted earnings of $0.18 per share, and that beat the consensus forecast by a penny.
Looking more closely at IMAX's financials, you can see several signs of sluggishness from the theater chain. Revenue from sales and sales-type leases managed to inch upward by less than 1%, and ongoing rent, fees, and other revenue from IMAX systems boosted the entire segment by about 3%. Theater system maintenance sales also climbed a healthy 8%, but joint revenue sharing arrangements saw sales get crushed by almost a quarter. Film-related revenue also fell by 24%, and that produced the overall top-line declines for IMAX. Meanwhile, costs actually grew compared to year-ago levels, and that helped send IMAX's gross margin plunging by nearly 10 percentage points to 54.8%.
Still, IMAX had success in ramping up the size of its theater network. The company boasted 19 signings for sales and sales-type lease arrangements, but the real growth came from 75 new joint revenue sharing arrangements. Installation activity remained consistent with year-ago levels, including 38 new theaters and two IMAX upgrades. However, the backlog for systems climbed by more than 50 to 442 theaters, and the number of commercial IMAX multiplex locations is rapidly approaching the 1,000 mark.
Weakness in the movie industry hurt IMAX. The company said its global box office revenue on average per screen plunged by more than a third to $268,200. Gross box office figures fell 24% to just under $261 million in the quarter, but that was coming off what was a record quarter for IMAX last year.
IMAX CEO Richard Gelfond pointed to the installation and new-theater agreements as evidence of the company's ongoing demand. "Demand for IMAX theaters has never been stronger," Gelfond said, "and bodes well for our business as more signings lead to more installs, which then lead to more box office and ultimately to greater revenue." The CEO noted that in just the first half of 2016, IMAX already has almost as many deals in place as it did for the full year in 2015.
What's next for IMAX?
IMAX now thinks it can ride the wave of interest in theaters to even greater success. The company boosted its installation guidance once again, and it now expects IMAX will put in 155 theaters this year, up from its most recent previous range of 135 to 140. Given IMAX started the year expecting just 115 to 120 installations for 2016, the rapid movement upward bodes well for the business.
The biggest contributor of that success has been huge deals with large companies. IMAX got a 40-theater revenue-sharing arrangement with China's Guangzhou JinYi Media, and it also signed a 25-theater deal with U.S.-based AMC Entertainment. Multi-theater agreements make it easier for IMAX to grow its network quickly, and it shows the huge demand for IMAX installations in areas across the globe.
With the rise of joint revenue-sharing arrangements, IMAX participates more in the success or failure of the movies shown on its screens. Highly anticipated movie offerings like the new Marvel release Dr. Strange, the Star Wars-inspired Rogue One, and the eighth episode of the Star Wars series should bolster IMAX's results over the next couple of years.
IMAX shareholders didn't react strongly to the news, leaving the stock unchanged in after-hours trading following the announcement. It's always hard for a stock to climb following a quiet quarter, but investors can count on greater share-price movement when Hollywood returns to full strength and gives IMAX the content it needs to excel.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends IMAX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.