There was little reason to expect much out of this morning's quarterly report out of IMAX (NASDAQ:IMAX). The company is in the costly process of migrating to its IMAX Digital projection system. The films that hit the big screen on IMAX during the quarter were cinematic duds such as Time Warner's (NYSE:TWX) Speed Racer and Viacom's (NYSE:VIA) Shine a Light, before DreamWorks Animation's (NYSE:DWA) Kung Fu Panda spiced things up toward the quarter's end.

Unfortunately for IMAX, it couldn't live up to even Wall Street's watered down expectations. Revenue fell by 22% to $21.2 million for the period, as both film and installation revenue fell during the period. The quarterly loss widened to $0.29 a share, after losing just $0.11 a share a year earlier. Analysts were looking for a loss of $0.19 a share on a 9% top-line dip.

The lackluster performance was enough to send the shares 6% lower at the open today. That may seem tame given the dramatic underperformance, but it's a sign that investors are already looking ahead to rosier prospects.

Things should pick up quite nicely at IMAX at this point, and there are several reasons why.

  • Last month's release of Time Warner's The Dark Knight has grossed more than $32 million on IMAX screens, or nearly double what the three second-quarter films scored in ticket sales combined.
  • The fourth quarter slate looks just as appetizing, with the next installment in the Harry Potter series and Madagascar 2: The Imax Experience on tap.
  • IMAX closed out the second quarter with a record backlog of orders for new theater installations.
  • Despite the wide deficit, IMAX still expects to return to profitability next year.

However, perhaps the biggest catalyst for optimism is that the company completed the installation of the first three IMAX Digital screens in the Washington D.C. area. It expects to have 50 systems in place by the end of the year.

The digital migration is critical for IMAX. It's also crucial for the industry, as companies such as Thomson (NYSE:TMS) and AccessIT (NASDAQ:AIXD) are working the same digital magic on conventional multiplex screens. The savings of moving to crisp, inventory-free films will be substantial. It will also give IMAX and its exhibitor partners, including AMC and Regal Cinemas (NYSE:RGC), more programming flexibility. The company expects to put out 10-12 digital releases a year, more than the 6-8 films it has been able to do in the costly reel world. This will help the company get over its duds -- cough, cough, Speed Racer -- quickly, while cashing in on Hollywood's hits.

Other hits to catch on your not-so-big monitor screen:

IMAX has been recommended to Motley Fool Rule Breakers newsletter service subscribers. DreamWorks Animation is a Stock Advisor selection. Toy around with either newsletter service with a free 30-day trial.

Longtime Fool contributor Rick Munarriz is a movie buff but he does not own shares in any of the companies in this story, save for DreamWorks Animation. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.