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IMAX Earnings: Positioning the Company for Future Success

By Danny Vena - Jul 30, 2017 at 12:06PM

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A disappointing slate of movies continued to weigh on both Hollywood and exhibitors alike, but IMAX isn't waiting for the rebound. It is taking steps now to position itself for the future.

Going into IMAX Corporation's (IMAX -0.12%) quarterly financial report, investors wanted to know if the weak slate of Hollywood blockbusters that weighed on results earlier in the year had improved enough to break the company out of its downward trajectory. It turns out that moviegoers found little reason to venture out, and IMAX results continued to pay the price.

IMAX reported revenue of $87.8 million, a 4% year-over-year decline, and a GAAP net loss of $1.7 million, which translated to a $0.03 loss per share. Accounting for one-time items related to cost-cutting initiatives and reorganization, the company produced earnings per share of $0.15, a 17% drop from the prior-year quarter. 

Theater owners continue to show confidence in the ability of IMAX theaters to attract customers. During the most recent quarter, the company signed agreements to install 92 new theaters, bringing the backlog to 580 systems, a 31% increase over the prior-year quarter. With 34 system installations in the current quarter, the global network of IMAX theaters grew to 1,257 locations in 75 countries.

IMAX camera positioned by a lake in a barren location.

IMAX suffered from disappointing movie offerings. Image source: IMAX 

Weaker box office a key factor

Several factors contributed to the lackluster results. Disappointing box-office results during the quarter led to the malaise, as IMAX performance is typically beholden to the slate of movies available to show. Weak results were also a factor in China, where fewer movies resonated with customers there. IMAX had a significant number of recently built theaters in the most populous country, with roughly 28% of the 443 theaters installed in the previous 12 months. Many of those locations were in Chinese malls, which typically take time to attract new customers.

The movie industry, in general, has also been under pressure to shorten the release window before movies are available to the public, which has resulted in fears of lower profits for exhibitors. Hollywood studios have been pushing to release movies for in-home on-demand viewing within weeks of their theatrical releases. Uncertainty regarding how this will affect moviegoers has driven down stock prices for most of the big exhibitors, and IMAX was no different.

Not waiting around

IMAX has initiated a series of steps to improve its results going forward. The company announced that it would lay off 14% of its workforce, or approximately 100 employees, and reorganize the company in an effort to reduce costs, which IMAX estimates will result in savings of $20 million annually. The company will also be playing fewer 3D versions of movies, citing public demand for more 2D titles and IMAX has begun shortening the length of time that most movies will play in its theaters. Finally, the company is working with partners to add premium seating to numerous IMAX locations.

The company announced a new repurchase plan to buy back $200 million in shares over the coming four years. At recent prices of approximately $20 per share, IMAX could potentially reduce its share count by as much as 15%, increasing the amount of earnings attributable to each share. 

Future growth of VR

IMAX believes that virtual reality (VR) will be a potential driver of future growth. The company previously announced an agreement with Time Warner Inc.'s Warner Bros. Home Entertainment to produce original interactive VR content for Aquaman and Justice League. This follows a partnership with Alphabet's Google to develop a cutting-edge VR camera, which are uniquely suited to address challenges posed by VR.

IMAX opened its second VR center on Memorial Day weekend in New York, following the debut of the location in Los Angeles earlier this year. While the L.A. site is a standalone location, the NY site is housed in a multiplex, which will bring additional foot traffic. The company expects to open an additional five to eight VR locations by the end of 2017, with upcoming unveilings in Shanghai, Manchester, and Toronto. IMAX will continue to evaluate which type of location works best for the facilities, with upcoming tests in shopping malls and retrofitted auditoriums joining the multiplex and standalone locations.

Looking ahead

Rather than focus on the past, IMAX highlighted the success of Dunkirk, for which IMAX scored a record 23% of the opening weekend box office. IMAX CEO Richard L. Gelfond noted, "While several films in the second quarter underperformed our expectations, the recent release of Christopher Nolan's Dunkirk emphasizes the value in viewing our business as a portfolio of films."

While there is little that IMAX can do about the slate of movies produced by Hollywood, it is taking steps to ensure that it can capitalize when those offerings improve. The combination of cost cutting, shares buybacks, and realignment of its business will pay dividends going forward and position IMAX for a better tomorrow.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares) and IMAX. Danny Vena has the following options: long January 2018 $640 calls on Alphabet (C shares) and short January 2018 $650 calls on Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and IMAX. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.

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