IMAX Earningcall Transcript Of Q2 of 2024
Fernandes, our chief financial officer. Rob Lister, chief legal officer, is also joining us today. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our earnings press release and the slide presentation have been posted on the investor relations section of our site. Our historical Excel model is posted to the website as well. I would like to remind you of the following information regarding forward-looking statements. Page 1 Today's call, as well as the accompanying slide deck, may include statements that are forward-looking and that pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause our actual future results to not occur or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information, future events or otherwise. During today's call, references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures, as well as the reconciliation to non-GAAP financial measures are contained in this morning's press release and our earnings materials, which are available on the investor relations page of our website at imax.com. With that, let me now turn the call over to Mr. Richard Gelfond. Rich? Richard Lewis Gelfond -- Chief Executive Officer and Director Thanks, Jennifer and thanks, everyone for joining us today. IMAX powers awe-inspiring experiences. We are a go-to end-to-end technology platform for the world's greatest filmmakers and creators. We deliver the biggest Hollywood and international blockbusters, original documentaries and immersive events at scale worldwide across 90 countries and territories. These attributes have been on full display. IMAX delivered one of the best years in its history in 2023. And while last year's Hollywood strikes dealt the entire entertainment ecosystem a temporary Page 2 setback, it was just that temporary. Now, with the strikes and the lingering effects of the pandemic firmly behind us, we are in the excellent position to fully realize the benefits of our strong asset light business model. We're on a tear in network growth with both system sales activity and installations. And the slate through '25 and '26 looks as good as we've ever seen. As we predicted, we began to see this pivot back to progress during the second quarter. The record performance of Inside Out 2 led a succession of recent box office hits demonstrating that supply, not demand, depressed the global grosses of the early summer. The third quarter is off to a strong start. Twisters easily beat expectations at local Chinese title successor open bid leading IMAX to a $21 million global weekend. Deadpool & Wolverine is set to continue the trend and deliver a massive opening this weekend. IMAX is commanding a healthy percentage of presales, in line with what we saw for the big debut of Doctor Strange 2, which opened to $33 million in IMAX's global network. And the fourth quarter looks strong with buzz building for Wiccan, Gladiator 2 and Joker 2, which was filmed without cameras and will receive a select run in IMAX film. Furthermore, we continue to strengthen our strategic position. We locked a landmark deal in China with our biggest exhibition partner worldwide Wanda Film. A record of at least 14 releases in 25 are being filmed with IMAX cameras. And we successfully launched our original documentary, The Blue Angels, further diversifying our content portfolio. Several signs in our financial and operating performance demonstrate our growing momentum. Our second quarter financial performance significantly beat consensus estimates across most key financial metrics. We expect to achieve year-over-year growth in installations. Page 3 On this call, raising the floor of our guidance from 120 installs to 130 new or upgraded systems this year with the high-end remaining at 150. Through the second quarter, we've installed 39 IMAX systems, compared to 29 over the same period in 2023. We've signed agreements for 99 newer upgraded IMAX systems worldwide year-to-date compared to 84 over the same period of '23. And cash from operations climbed to $35 million in the quarter, up significantly year over year from $5 million last year. Consistently, IMAX has navigated periods of disruption to deliver strong results. Yet, we know it's not about what we've done, it's about where we're headed. And we believe IMAX is entering a new very productive era with clear catalysts for growth over the next several years. This is a very promising moment for our business and our shareholders. Today, I'd like to offer updates on our global network and then our content slate. Then, I'll hand it over to Natasha before we take questions. On the global network, first, this positive pivot across our business extends to our global network, where both sales activity and installations accelerated during the second quarter. IMAX signed agreements with nine different exhibition partners including four new clients covering priority markets including India, France, Southeast Asia and more recently Saudi Arabia. And ongoing conversations with existing and new exhibition partners around the world are robust. Our deal with Wanda Film spanning up to 123 upgraded new and renewed IMAX system holds significant strategic promise even beyond the 100 of millions at the box office that these locations stand to generate over the next decade. This is our first agreement with Wanda since Tencent-backed Ruyi Holdings acquired a controlling interest in the company last year and a strong vote of confidence by its new management team. Many of the upgraded systems are in Tier 1 cities Page 4 and among the top 40% of IMAX China locations. The deal includes collaboration on the content side. We see powerful potential for delivering alternative content with Wanda Pictures and Tencent, especially when you factor in the interest of Rui and Tencent, the latter of which owns a significant stake in Epic Games and is the exclusive streaming partner for the NBA in China. We're very encouraged by the upcoming content slate in China and we believe the market is on the cusp of a rebound. In the past two weeks, local hits have reignited the box office including successor, our biggest local opening in the market since Chinese New Year. We have two local film for IMAX releases this summer, Decoded and The Traveller. And early indications are that next year's Chinese New Year holiday will offer an exceptionally strong slate including a local film for IMAX title. Additionally, more Hollywood films are securing Chinese release dates even edgier R-rated fare like Deadpool and Wolverine. And the region remains a fertile testing ground for new events, experiences and technologies. Last month, we partnered with the NBA to stream the NBA finals live to IMAX locations in Hong Kong and Taiwan. The event sold out in hours and 73% of attendees were first-time IMAX consumers, which is obviously significant for the way we see the network growing. We can see a role for IMAX as an immersive event platform for North American sports leagues looking to grow global franchises. We also announced that IMAX Enhanced will be featured on the world's first Android-based spatial computer, which debuts in China in October. It's similar to what Apple did with Vision Pro in the U.S. The positive pivot in our business is also very evident in the content pipeline with the film slate set to come roaring back over the next several years. We have more film for IMAX titles than ever in 2025. Every IMAX release from May through Page 5 September is filmed with IMAX cameras including Mission Impossible 8, Marvel's Fantastic Four and Thunderbolts. Apple's F1 starring Brad Pitt from Top Gun: Maverick Director, Joe Kosinski and producer, Jerry Bruckheimer and Superman: Legacy. Our Film for IMAX program has become a key driver of sales for IMAX systems worldwide. Film for IMAX releases like Top Gun: Maverick, Oppenheimer and Dune: Part Two prove that films shot with our cameras deserve to be experienced on IMAX screens. Exhibitors value that and the premium ticket prices and the incremental box office that IMAX delivers. Our slate is almost fully committed for the entire year in 2025. 2025 ends with Avatar 3 and then 2026 kicks off with the carryover box office in January and it also includes installments of Avengers, Star Wars, The Batman, Super Mario Brothers and Toy Story. Alongside our expanding portfolio of local language documentaries and events and experiences, we continue to make progress in opening our content aperture to deliver a greater diversity of experiences for our audiences and drive capacity utilization for our global network. The Blue Angels was an excellent first outing for our newly revamped original documentary strategy. In its one week IMAX exclusive commercial release, the film scored the highest grossing theatrical documentary opening year-to-date. It has earned more than $2.2 million in IMAX box office so far. We sold the streaming rights to Amazon Prime Video, where it was the most watched original film on Prime of any kind documentary or feature in its first weekend. And in its first full week, it was the third most watched original film on any streaming service per variety insight with 1.9 million views. In early 2025, it will release across IMAX's institutional network. The sale to Amazon drove significant incremental revenue and we will continue to reap the benefits across its institutional run, Page 6 where it could conceivably play for years. We have several more original doc-busters in our pipeline including the upcoming Stormbound with producer, Adam McKay, which will capture the most powerful hurricanes with IMAX cameras. We continue to build out a robust pipeline of music content as well including an IMAX exclusive event from Donald Glover next year, our exclusive recent live event for the Beach Boys documentary ahead of its debut on Disney+ and Queen Rock Montreal, which continued to deliver with a one way bring back in Japan in May and its Chinese debut at the Shanghai International Film Festival. We're experimenting in additional verticals from recurring programming like our partnership with A24 to market activations including our multi-city launch event for Prime Video's hit Fallout. We held our biggest live event to-date with an interactive fan event for Twisters across 180 locations, which helped IMAX drive strong over 11% indexing on the film's domestic debut last week. And tomorrow, we'll host a special presentation of the Paris 2024 Olympics Opening Ceremony with Comcast, Universal, NBC. To close, we believe we've reached a pivot point in the post-strike rebound. Given surging demand for the IMAX experience among filmmakers, studios and audiences worldwide, we stand on the verge of an extremely exciting time for our business. Our global network at less than 50% estimated penetration worldwide is well-primed to grow and drive even more attractive scale economies for our business. The pipeline of blockbusters over the next several years is truly without precedent representing incredible filmmakers and the most valuable IP in entertainment and will further diversify our content portfolio with awe-inspiring experiences to drive greater utilization of the IMAX network. We look forward to continuing to deliver results in our business and for our shareholders. Thank you, again. With that, I'll turn it over to Natasha. Page 7 Natasha Fernandes -- Chief Financial Officer Thanks, Rich and good morning, everyone. As Rich stated, it is clear our business is at a positive inflection point with global box office, system sales and installations accelerating ahead of a strong Hollywood and local language slate. We are also very encouraged by the growing diversity of our business and revenue mix, highlighted by contributions from new and emerging revenue streams not tethered to studio product. Event and experiences The Blue Angels, Queen Rock Montreal and The Beach Boys further diversify our business while driving capacity utilization across our global network. Our Streaming and Consumer Technology business also adds revenue diversity by bringing in high-margin licensing and software revenue. Given the incrementality in our business model, we believe the momentum in our core business, coupled with the growing contribution from emerging revenue streams, creates a potent combination, one that will enable us to drive accelerating and sustainable growth. Turning now for a recap of our Q2 results, where we exceeded consensus expectations across most metrics. We delivered revenue of $89 million. Within that, Content Solutions revenues of $35 million grew 12% year over year, driven by the sale of streaming rights of the Blue Angels documentary to Amazon and growth in alternative content that more than offset the lower strike impacted box office performance. We are very encouraged that our strategy to unlock value for our documentaries in our commercial network and unstreaming platforms is bearing early fruit. Turning to Technology Products and Services, system installations grew 20% year over year, and this quarter's mix included a higher level of joint revenue sharing arrangements than last year. Overall, revenues of $51 million declined 20% year over year driven by the lower box office impact on rental revenues, as well as the installation mix that led to lower upfront system sales. Page 8 SG&A excluding stock-based compensation was $31 million, a 4% improvement year over year. As a reminder, Q2 is generally our highest spend for global sales, marketing and events. Even with these costs, we saw lower spend year over year, driven by operational efficiencies and cost initiative benefits. Overall, the second quarter total consolidated adjusted EBITDA of $31 million was at a 34.8% margin, compared to 36.7% in the prior year, with declines in gross margin from lower box office and revenue mix being partially offset by SG&A and R&D savings. For the first half, total adjusted EBITDA margin was 37.5% and in line with our full-year guidance of high-30s percent. Lastly, adjusted EPS in Q2 was $0.18, which easily beats consensus and compares to adjusted EPS of $0.26 in the year-ago period. Turning to our global network. System installations and signings both showed very good growth in Q2, as demand for IMAX continues to grow in advance of the expected strong box office slate that Rich described. During the quarter, we completed 24 system installations, up 20% over Q2 2023, which puts us at 39 installations for the first half, a growth of 34% year over year. Of the Q2 installations, 67% were new locations with over 60% of these in the Rest of World outside of North America and China. Signings activity increased dramatically to the 87 in Q2 versus 46 in the prior year with more than a quarter of these signings expected to be installed in 2024. The accelerating pace of installations and signings along with our significant backlog of over 500 systems at the end of Q2 gives us confidence in our network growth trajectory. As a result, we have raised our 2024 full-year system installation guidance range to 130 systems to 150 systems from 120 systems to 150 systems with the low end of the range above full-year 2023 installations of 128 systems. Turning to cash flow and the balance sheet. We had a strong operating cash flow in Q2 of $35 million that compared to $5 million in the prior year. The higher year over Page 9 year operating cash flow reflects the timing of box office receipts, as well as improving working capital. This has been a focus and I'm pleased to see the progress. Our capital position remains very strong with $91 million in cash and $287 million of debt excluding deferred financing costs, reflecting a sequential reduction in net debt of $25 million. As a reminder, $230 million of our debt comes from our convertible senior notes due in 2026 that bear an interest rate of 0.5% per annum with a capped call leading to a $37 per share conversion price. Our current available liquidity is $392 million, which includes $300 million in available borrowing capacity under the company's varying revolving facilities. From a capital allocation perspective, year-to-date, we spent $15.6 million on capex, including $10 million on growth capex and $18 million on IMAX share repurchases. IMAX repurchases were weighted toward the first quarter when our share price was pressured following the Hollywood strikes. We determined the level of repurchases by considering the share price, available excess cash and the cost of borrowing, while also factoring in competing uses of cash including growth capex to expand our IMAX network. We are focused on driving shareholder returns and have spent $175 million to buy back 11.5 million shares or approximately 19% of our shares outstanding since 2020. This share reduction gives us the potential for meaningful adjusted EBITDA per share and adjusted EPS expansion in 2025, given the expected box office trajectory. We'll continue to focus on shareholder returns following the approach I outlined. In total, we have $151 million available remaining under our share repurchase authorization. While we are pleased with our financial performance and our resilience through a disruptive period for the entertainment ecosystem, we have also been focused on continuing to improve the way we run the business from an operating Page 10 and financial perspective. Over the past nine months, we have looked closely at the global operating structure of our business. That evaluation has led to operational improvements and savings, as well as a better alignment of our intellectual property ownership structure to maximize earnings power and improve tax efficiency. We have taken several steps, of which the results are reflected on our financials this quarter, and we expect to manifest more benefits going forward. First, we have begun to streamline our global operations, including restructuring IMAX China to gain greater efficiencies with IMAX Corporation, which has resulted in the elimination of certain roles and reductions in overhead expenditures. These organizational and tax efficiency gains have allowed us to capture a number of benefits we were aiming to realize from the IMAX China privatization effort we engaged in last year. Thus, our incentives to taking that business private have decreased. Secondly, as previously discussed, we have been adversely impacted by tax valuation allowances most quarters since the pandemic, resulting in an unusually high tax rate. During the second quarter, we reorganized our legal entities to optimize our tax structure to reflect the mix of our business and where we are making investments and realizing the most profit. As a result, we recognize a tax benefit in Q2 stemming from this reorganization, and we expect in the future, this structure will result in the creation of additional value from our IP and a more effective global tax rate. These are some very positive outcomes that help support greater IMAX profitability and earnings in the future. To conclude, we have real momentum across the key drivers of our business, global box office, system sales and installations ahead of an extremely promising diverse film slate over the next several years with more IMAX DNA than we've ever seen. At the same time, new revenue streams are contributing to our growth and driving greater capacity utilization across our IMAX global network. Page 11 A strong opportunity given one point of utilization can drive $75 million to $100 million in additional box office. Along with our increasing confidence on network growth from system installations, the third quarter is off to a great start. We're on the cusp of 100 system signings and delivered three consecutive hits in Twisters, China's Successors and the strong presales for Deadpool & Wolverine. Given the strength of our business model, the tailwinds in the market and our continued focus on streamlining our operations to unlock efficiencies, we believe IMAX is poised to deliver strong growth, expanding margins and increased cash flows for years to come. With that, I will turn the call over to the operator for Q&A. Questions & Answers: |
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