The movie industry is a fickle place to work, with booms and busts coming and going at a fevered pitch. That makes things difficult for theater operator IMAX (NYSE:IMAX), because it largely relies on content produced by other companies to bring traffic through its theater doors. That's great when blockbuster movies are successful, but during off periods, it makes things more difficult.
Coming into Thursday's third-quarter financial report, IMAX investors were ready to deal with lower revenue but wanted to see the company squeeze some more profit out of its customers. IMAX's work on that score was even better than hoped, and the results put the company in a good position as the key end-of-year season for the movie industry gets underway.
IMAX keeps shining
IMAX's third-quarter results reflected the efforts that the theater company has made to promote profit growth even when top-line figures are sinking. Sales were off 17% to $82.1 million, but that was actually a bit less dramatic than the nearly 19% drop that most of those following the stock were expecting to see. Net income of $7.5 million was up nearly 160% from year-earlier levels, and the resulting adjusted earnings of $0.14 per share was considerably better than the $0.11 consensus forecast for per-share earnings.
IMAX managed to boost its bottom line without box office support. Gross box office figures were down 6% to $206.5 million during the quarter, despite the fact that IMAX showed 29 films over the three-month period, up from 24 in the same time frame in 2017.
Network expansion has been a long-term driver of IMAX's success, and the company didn't hesitate to keep moving forward in that direction. IMAX installed 37 theater systems, raising its total count to 1,443, and it signed contracts for 25 new theaters and 12 upgraded locations during the quarter. IMAX's backlog climbed to 635 theaters, up by 90 from where the number was 12 months ago.
Sales weakness was spread across IMAX's business units. The theater business segment suffered a 6% top-line decline, with gross margin falling sharply because of fewer installations than IMAX performed a year ago. In the network business, sales were down more sharply, with a 14% decline reflecting weakness in both digital media remastering and joint revenue-sharing arrangements.
Can IMAX come out with a blockbuster performance to end the year?
CEO Richard Gelfond was generally content with how the quarter played out. "Compelling blockbuster content from Hollywood and China," Gelfond said, "coupled with our ongoing focus on controlling costs, helped drive our third consecutive quarter of operating margin expansion." The CEO also noted that top filmmakers are becoming increasingly interested in the IMAX format, because premium presentation appeals to their desire to make as big a splash as possible in the movie and entertainment industry.
IMAX also has high hopes for the future. As Gelfond put it, "We expect many of the factors contributing to our strong performance this year to benefit the company into 2019 and beyond, including the rapidly evolving media landscape. The convergence of streaming and traditional media platforms creates interesting opportunities for IMAX."
It'll be interesting to see how trends in the theater industry affect IMAX going forward. The rise and fall of MoviePass has made surviving theater operators look more closely at the value proposition of visiting a theater location, and some variants of the subscription-based model for moviegoing might well survive. To the extent that key partners work with IMAX to boost viewership, sacrificing some incremental ticket revenue in order to build audiences might well end up working in IMAX's favor in the long run.
IMAX shareholders seemed to focus largely on the modest revenue shortfall rather than the strong earnings, and the stock therefore dropped 4% at midday following the announcement. Yet with IMAX having held up so well even in a lackluster quarter, the return of blockbusters could well bring a new episode of growth to the theater specialist's bottom line.