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IMAX's Q4 Earnings Miss, Revenues Beat Estimates, Down Y/Y

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IMAX Corporation (IMAX - Free Report) delivered fourth-quarter 2018 adjusted earnings of 26 cents per share, which missed the Zacks Consensus Estimate by a penny and declined 23.5% year over year.

Total revenues of $108.9 million surpassed the Zacks Consensus Estimate of $101.4 million. However, the figure declined 13.2% from the year-ago quarter. The decline can be attributed to the absence of revenue contribution by Inhumans television series in fourth-quarter 2017.

Category-wise, Equipment and product sales were $46.4 million, up 16.9% from the year-ago quarter. Additionally, finance income increased 30.8% year over year to $3.1 million. However, services and rentals revenues were down 31.4% and 21.2% year over year to $42.8 million and $16.7 million, respectively.

Segment Details

IMAX network business revenues were $41.7 million, down 22.5% year over year.

Within the segment, IMAX DMR revenues declined 20.5% from the prior-year quarter to $25.2 million.

Gross box office from IMAX DMR films declined 14.9% year over year to $236.7 million in the reported quarter. The decline was due to the lack of strong film slate. Notably, solid contribution from films like Star Wars: The Last Jedi aided box office results in fourth-quarter 2018. The company exhibited 29 films (22 new and seven carryovers) compared with 26 (22 new and four carryovers) in the year-ago quarter.

For the first time, IMAX crossed the $1-billion global box office mark in 2018 and marked the highest-grossing year in China. Greater China box office revenues increased 16% year over year to $337 million in 2018.

Notably, Greater China box office increased 61% to $78 million on a year-to-date basis. Moreover, in the Chinese New Year period, box office revenues surged 40% year over year to $32 million owing to the solid performance of Wandering Earth. The film, which generated $45 million of IMAX box office, is the highest grossing title in China.

IMAX is using consumer behaviour to channel the success of its films. For instance, Wandering Earth, which was one of the three movies released on Feb 5, didn’t debut at number one on the day of its release. However, as the film got highest ratings on the release date, on ticketing platform Maoyan, IMAX and its partners have increased the number of shows, which lead to increased collections for the movie.

To build upon its success, the company noted that it will launch CRM platform with Maoyan in second-quarter 2019. Notably, Maoyan accounts for about 60% of online tickets sales in China, where 85% of the tickets are sold online.

Attendance at IMAX theaters increased 16% against the industry’s decline of 12%.

Joint revenue sharing arrangements-contingent rent was $16.5 million, down 20.7% from the year-ago quarter.

IMAX theater business generated revenues of $61.9 million, increasing 11.5% year over year, primarily due to the adoption of new revenue standard and instalment of two sales-type theaters.

Within this segment, IMAX systems revenues increased 19.8% from the year-ago quarter to $41.1 million. Additionally, theater system maintenance revenues were $12.2 million, up 2.5% from the year-ago quarter. However, other theater revenues declined 28.3% from a year ago to $2.7 million in the reported quarter.

New business revenues plunged 94.1% year over year to $770K. Other revenues surged 43.6% from a year ago to $4.6 million. Solid revenues in fourth-quarter 2017 were attributed to the launch of Marvel's Inhumans.

Network Growth Statistics

In fourth-quarter 2018, IMAX installed 88 theater systems, of which 67 were for new theater locations. In 2018, IMAX installed 172 theater systems, of which 149 were for new theater locations. As of Dec 31, total IMAX theater network consisted of 1,505 systems, of which 1,409 were in commercial multiplexes. Notably, in 2018, IMAX had a total of 37 IMAX Laser theaters on a worldwide basis.

There were 564 theaters in backlog as of Dec 31, 2018 compared with 499 in the corresponding period of 2017.

IMAX signed contracts for 12 new theaters and 2 upgrades in fourth-quarter 2018. In 2018, the company signed contracts for 203 IMAX Laser systems, of which 59 were for new systems, 114 for upgrades to existing IMAX theaters and 30 for amendments to existing backlog arrangements. Few partners increasingly installing IMAX Laser systems include Cineworld, AMC Networks (AMCX - Free Report) and Pathé.

IMAX noted that as companies like Disney (DIS - Free Report) and AT & T’s Warner Bros. are increasingly choosing its IMAX DNA technology, it is able to provide a differentiated and unique experience, which is definitely a positive. AMC's new Stubs A-List subscription service is driving additional customers to IMAX theatres, per management.

IMAX and DTS launched a program called IMAX Enhanced to provide best-quality picture and sound experience to in-home entertainment users. Some of the partners involved in the program include Tencent Holding (TCEHY - Free Report) , Sony, Fandango and Sound United.

Operating Details

In the reported quarter, gross margin surged 220 basis points (bps) on a year-over-year basis to 50.1%.

Network gross margin contracted 510 bps on a year-over-year basis to 59.2%. IMAX DMR gross margin contracted 10 bps to 60.5%. Gross margin for joint revenue-sharing arrangements was 57.2% in the reported quarter as compared to 67.8% from the year-ago period.

Theater gross margin contracted 560 bps on a year-over-year basis to 47.1%.

Adjusted EBITDA was $36.4 million in the reported quarter compared with $133.2 million in the year-ago period. Adjusted EBITDA margin contracted 230 bps to 37.3%.

Selling, general & administrative (SG&A) expenses increased 20.6% year over year to $30.4 million. However, research & development (R&D) expenses plunged 64.8% year over year to $2.2 million.

Operating income margin was 3.4% in fourth-quarter 2018 compared with 19.8% in the year-ago period. The decline in operating income was due impairment charge of about $6.9 million related to the closure of the VR pilot program.

Balance Sheet

As of Dec 31, 2018, IMAX had cash and cash equivalents of $141.6 million compared with $133 million on Sep 30.

Cash flow from operations was $109.9 million compared with $85.4 million in fourth-quarter 2017. Free cash flow was $18.3 million in the reported quarter and $53.1 million in 2018.

In the reported quarter, IMAX purchased 1.2 million shares worth $25 million. In 2018, the company purchased 3.4 million shares worth $72 million.

Upcoming Releases

Upcoming Hollywood releases include Captain Marvel in March, Avengers Endgame in April, and Lion King, Spider-Man, It: Chapter 2, Toy Story 4 and Star Wars Episode 9, to name a few. Notably, Avengers Endgame is fully filmed with IMAX cameras. Additionally, Avatar, Top Gun and Wonder Woman 2 will be released in 2020.

Guidance

First-Quarter 2019

Box office revenues may be low as the year-ago period owing to lack of major releases except Captain Marvel.

2019

Box office is expected to grow in the mid-to-high single-digit range. IMAX is anticipated to install 185-190 theater systems. The company expects to upgrade 45 screens to IMAX laser.

Currently, IMAX carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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