IMAX's Blockbuster Year Continues

Based on the market's unenthusiastic response to IMAX's (IMAX 1.69%) second-quarter results, you'd think the company had a barely passable quarter, but nothing could be further from the truth. The company reported its strongest quarter ever at the box office -- even after a blockbuster first quarter. This confirms what IMAX has long posited: that consumers are willing to pay up to see their favorite popcorn fare on the bigger big screen.

IMAX reported revenue of $98.3 million, up 12% year over year but shy of analysts' consensus estimates of $98.84 million. Cost-cutting measures the company instituted last year helped IMAX drop a much greater share of revenue to the bottom line, with net income margins of 10.4%, compared to just 2% this time last year. This generated adjusted earnings per share of $0.30, double the $0.15 achieved in the prior-year quarter and besting analysts' expectations of $0.26.

Image source: IMAX.

The raw numbers

Data source: IMAX Second-Quarter 2018 Financial Release. Chart by author.

A blockbuster quarter

An important takeaway from these impressive results is that while North American box office grew by just 10% during the first half of the year, IMAX grew 34% -- meaning the large-screen purveyor is commanding a greater percentage of movie viewers when they go to the theater. 

The success was broad based across the company's geographic segments, and CEO Rich Gelfond noted during the conference call that it was the first time in the company's history that each of the domestic, Greater China, and other international segments had generated north of $100 million in IMAX box office.

Data source: IMAX Second-Quarter 2018 Supplemental Slides. Chart by author.

Network business, which includes digital remastering and joint revenue-sharing arrangements, increased 28% year over year to $60.8 million. The theater business -- which includes system sales -- fell by 6% compared to the prior-year quarter. It's important to put that into perspective, as system sales tend to be unpredictable from quarter to quarter. For the first half of 2018, the theater segment grew 18% compared to the first six months of 2017.

An all-star cast

IMAX reported 138 theater signings in the second quarter, up from 95 in the prior-year quarter. This included 40 new theaters and 98 electing to upgrade to the new IMAX with laser system. The economics of these upgrade deals is favorable for IMAX, as these deals extend the contract terms for an additional 10 to 13 years. With 31 installations completed in the second quarter, this brings the total backlog to 635, compared to 580 this time last year. This brings the total IMAX network to 1,410 theaters, up from 1,257 this time last year.

It's also important to highlight that IMAX is making progress on several strategic goals the company put in place last year to reduce costs, increase box office, and buy back $200 million in shares over the coming four years. Gross margins for the quarter improved to $60.4 million or 61.4% of revenue, compared to $49.5 million or 56.4% of revenue for the prior-year period. Operating expenses during the period of $30.3 million represented 30.8% of revenue, compared to 32% of revenue in the year-ago quarter, as the company's cost-cutting measures take hold.

And yet...

With record results, improving margins, and cost cutting that is bearing fruit, I admit to being somewhat confused by the market's reaction to IMAX's results. Wall Street may have been too ambitious forecasting the company's top line, but by every metric that counts, IMAX delivered.