Hollywood has been plagued by a weak slate of movies this year and with the exception of a few big blockbusters, theatergoers have been staying home. Overall box office revenue has declined by 5% so far in 2017, and shareholders of theater stocks have been feeling the pinch. In the last six months, shares of IMAX Corporation (NYSE: IMAX) have given up a third of their value.
When IMAX reported its financial results last week, investors were looking to see if audiences were returning to theaters, and whether the plan the company announced last quarter to cut unnecessary expenses was making headway. IMAX did not disappoint.
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Bucking the industry decline
For the recently completed third quarter, IMAX produced revenue of $98.8 million, which grew 14% year over year, and blew the doors off consensus estimates of $84.7 million. While the company produced a net loss for the quarter, those results included impairment charges related to the company's cost-reduction initiative. Excluding those one-time charges, adjusted earnings per share of $0.08 soared past analysts' expectations of $0.03 per share.
The company also reported record global box office revenue of $219 million, which grew 17% over the prior year quarter, and represented the highest ever third-quarter performance for the movie purveyor. IMAX made a point of saying that its domestic box office increased 18% year over year, while overall industry ticket sales declined 14%.
IMAX saw revenue growth in each of its operating segments. Network business revenue of $42.6 million climbed 17% year over year, while revenue from converting films to IMAX jumped to $26 million, up 21% over the prior year quarter. Joint revenue sharing agreements increased to $15.6 million, a 10% increase over the same quarter last year.
What's driving this recent success?
Several key factors contributed to IMAX's success this quarter. Director Christopher Nolan, who has been a longtime proponent of IMAX technology, had a huge hit last quarter with World War II epic Dunkirk, which was filmed entirely with IMAX cameras. Heavy promotion resulted in the company capturing 23% of the entire domestic box office for the film.
The company's plan to cut operating costs seems to be paying off, as expenses declined 9% compared to the prior year quarter.
The network of IMAX theaters also continues to grow, as theater owners want to offer a premium experience to moviegoers. During the quarter, IMAX installed 51 theaters, growing its count to 1,302 systems. Strong demand for the company's technology continued, as the backlog of systems waiting to be installed grew to 545, a 9% increase over the prior year quarter. The company also signed 17 new contracts for locations over the prior three months, increasing the total to 147 so far this year in 28 countries.
IMAX also increased its forecast for installations this year, expecting the completion of 160 to 165 new systems in 2017, compared the outlook of 150 to 155 it provided at the end of last year.
International demand has been a key component of IMAX's growth. International box office, excluding China, now exceeds domestic ticket sales and grew 25% year over year. China saw more modest growth, with a still respectable 8% year over year increase.
What does the future hold for IMAX?
"Our third-quarter global box office marked IMAX's highest-grossing third quarter ever, growing 17% to $219 million," IMAX CEO Richard Gelfond said. "In addition to our box office growing 18% in the domestic market, despite the overall North America box office decline of roughly 14%, we also saw exceptional performance from our international, ex-China box office."
The company continues to believe that a growing presence in international markets will drive results and its recent initiatives to increase revenue and decrease expenses are bearing fruit.
Investors were elated with the results as the stock climbed over 10% following the release of the financial results. IMAX's success or failure will always be tied, to a certain extent, to the slate of movies available. However, as the company showed this quarter, it can effectively outperform the overall industry by focusing on key titles, embracing its recent emphasis on more 2-D movies, and controlling costs.
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