Coming Soon to IMAX: Profits
In his latest film incarnation, Batman rescues Gotham from the Joker. In real life, the Caped Crusader's blockbuster movie, The Dark Knight, is proving to be a lifesaver for IMAX (symbol IMAX), a chain of specialty theaters.
At their August 1 close of $7.59, the shares of the troubled company, which hasn't been profitable since 2005, have jumped 22% since July 3 as the film's box-office potential has became apparent. North American moviegoers purchased more than $300 million in tickets in the first ten days after the film opened, a record-setting pace.
More importantly for IMAX, fans are lining up to watch the movie in theaters equipped with the company's specialty movie-projection equipment. Six scenes were filmed using IMAX's large-format, high-resolution techniques, and their full intensity is apparent only in theaters equipped with the company's oversized screens (some as wide as 100 feet and as tall as eight stories) and high-end sound systems.
Tickets at IMAX theaters cost 30% to 40% more than at conventional theaters. Even so, from Dark Knight's debut on July 18 through July 28, moviegoers spent more than $20 million on tickets at 122 IMAX screens in the U.S. and internationally, well above expectations. Eric Wold, an analyst at investment bank Merriman Curhan Ford, calculates that IMAX accounted for 4% of the Batman film's first-weekend box-office revenues, despite representing less than 1% of the screens.
Wold, who rates the stock a "buy," says The Dark Knight signals the beginning of a "game-changing era" for IMAX, which has headquarters in New York City and Toronto. Digital technology, due to be introduced this year, will make the company's products more affordable to theater owners and studios, Wold says, and a new business model should eventually allow the company to find the profitability that has eluded it lately.
IMAX traces its origins to the 1967 world's fair in Montreal, where a crude early form of the big-screen film format proved popular with fair goers. Canadian filmmakers and entrepreneurs then founded a company to commercialize the technology. At first, giant-screen IMAX theaters were found primarily in museums and science institutions, which even today make up roughly half the IMAX network of nearly 300 theaters in 40 countries. Over the years, Hollywood has warmed to the company, and in 2002, IMAX came out with a technology that allowed it to digitally remaster studio blockbuster hits into its own format. The first film converted with the process was Apollo 13, released in September 2002.
IMAX owns only a handful of its theaters. It gets most of its revenues from licensing its technology and providing support for it to theater owners and to studios. However, revenues have never been robust enough to overcome the high cost of its technology, both to theater owners and to Hollywood studios.
It costs $22,500 to remaster a conventional two-dimensional film and $45,000 to remaster a 3-D film, and those prices are for each print. Popular movies have many prints in circulation. This has always limited the number of Hollywood films available to IMAX theaters, although the company says more than 20 blockbusters, including Spider-Man 3 and Harry Potter and the Order of the Phoenix (in 3-D), have been converted to the IMAX format.
In 2006, the company put itself up for sale but didn't find any takers. In addition, it revealed that the Securities and Exchange Commission was looking into questionable accounting practices. The stock, which had climbed to more than $10 in 2006 on buyout speculation, bottomed at $3.72 a year ago.
The company last turned a profit in 2005, earning $7.8 million (19 cents per share) on $133 million in revenue. Since then, revenues and profits have fallen steadily. Last year it lost $27 million (67 cents per share) on $116 million in revenue.
The first three completely digital IMAX theaters are slated to open later this year. At these locations, no expensive print will be necessary; the film will be contained on what is essentially a computer hard drive. By reducing the cost to studios of releasing their films in IMAX format, the company is hoping that Hollywood will eventually consider an IMAX version of a film as essential to its success as a DVD version.
Late last year, IMAX and AMC Entertainment, a big theater chain, agreed to install 100 digital IMAX theaters in 33 U.S. markets. A few months later, the company signed a 31-theater deal with Regal Cinemas. In both deals, IMAX has agreed to foot much of the cost of installing its technology in return for a percentage of the box-office revenues.
Wold estimates that IMAX's projected $27 million pretax operating earnings this year will surpass $100 million by the time these new theaters and 30 others are operating at the end of 2010. He says the shares could be worth more than $20 by then.
Nevertheless, investors should tread with caution. The company has a staggering $160 million of debt and a spotty operating record. The five analysts who cover the company on average foresee a loss of 34 cents per share this year. Next year, however, they predict that revenues will rise by nearly 25%, to $153 million, and that the company will earn 14 cents a share.