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Imax CEO Sees $1 Billion Box Office on China

Imax In China
Seats display the Imax Corp. logo at a cinema in Beijing. Photographer: Nelson Ching/Bloomberg

Imax Corp. Chief Executive Officer Richard Gelfond forecasts annual box office receipts will almost double to $1 billion in the next few years as the big-screen cinema company expands in China, Russia and the Middle East.

“We’ve identified 1,700 target markets to put Imax theaters into in the world, and about 500 of them are in North America, so over time the vast majority of our revenues are going to come internationally,” Gelfond, 58, said in an interview at the Toronto International Film Festival, where the company is presenting movies for the first time, including space thriller “Gravity.”

“China, we used to say we could do 90 theaters, now we have a backlog of close to 400,” Gelfond said on Sept. 9. “In the next couple of years our box office will get to a billion dollars.”

Imax, based in Mississauga, Ontario, has climbed 34 percent this year. It’s headed for a fourth year of gains in the past five years, as its theater network grew 145 percent. The company had 767 theaters in 54 countries as of June 30. Global box office receipts were $620.6 million in 2012, compared with $417.2 million in 2011, company documents show.

Imax theaters present films in both two-dimensional and three-dimensional formats on large-format screens with specialized sound systems. The 3D format uses dual projectors to display two images on a silver-coated Imax screen, one for each eye. Special glasses separate the images, which the brain then blends together into a 3D image.

Growth Story

“Imax is a tremendous long-term growth story as they expand their installed base, particularly their international base,” Tony Genua, a fund manager with AGF Management Ltd. who holds shares of Imax. He helps manage C$36.4 billion ($35.3 billion) at the firm. “China is first and foremost on their radar as an opportunity and it’s an underpenetrated market when it comes to cinemas and distribution.”

Imax reported $82.3 million in second-quarter sales on July 25, ahead of analysts’ average estimates of $77.2 million, data compiled by Bloomberg show. Adjusted earnings of 22 cents a share fell short of estimates of 26 cents. The shares rose as much as 1.5 percent to a two-year high and closed up 0.2 percent to C$29.85 at 4 p.m. in Toronto.

Revenue Sharing

Genua purchased shares of Imax in February, and has added to his position recently, he said. The company is increasingly leaning toward revenue sharing agreements, paying for part of the cost of building the cinema in return for part of the box office, providing a source of recurring revenue, he said.

Imax said it inked a revenue-sharing agreement to add three Imax theater systems in Dubai, Qatar and Bahrain on Sept. 4.

Gelfond forecast international ticket receipts will account for 60 percent of the company’s total in the next few years, up from about 56 percent.

“In China, we first went in about 15 years ago, when we weren’t as politically threatening as Hollywood,” said Greg Foster, CEO of Imax Entertainment, who attended a TIFF industry panel with Gelfond on Sept. 9. “We got in on the ground floor. China is its own market and if you treat it like Omaha you’re going to be in trouble.”

An Imax ticket can cost four times as much as a regular ticket in India, and there is at least one theater in Russia that charges $80 a ticket “that does very well,” Gelfond said.

“They want to be a brand on par with other premium consumer brands” such as Starbucks Corp. and Lululemon Athletica Inc., AGF’s Genua said from Toronto. “How does that happen? You stand for a premium experience at premium prices. Imax is able to do that.”

Laser Technology

Imax plans to introduce laser-based projection technology that will allow for screens 100 feet wide and audiences of close to 1,000 in the second half of 2014, Gelfond said. Current Imax screens average 65 feet wide with 357 seats, according to the company.

Imax stock faces risks including unpredictable box office performance of movies, declining interest in 3D offerings in North America as well as potential censorship of certain movies by the Chinese government, Genua said.

“Any incrementally negative government stance in China toward exhibition of Hollywood films” would be a risk, Townsend Buckles, media analyst with JPMorgan Chase & Co., said in a Sept. 3 note to clients. He rates Imax an overweight, the equivalent of buy.

Demand for 3D offerings at the cinema has “plateaued” in North America, with the premium offering now accounting for about 40 percent of an average movie’s box office receipts, said Paul Sweeney, director of North American research with Bloomberg Industries in Skillman, New Jersey.

3D Demand

Outside the U.S., 3D films account for about 60 percent of ticket sales. Whether that percentage will decrease is unclear, Sweeney said.

“We do 3D movies and 2D movies,” Gelfond said. “When a lot of people position themselves as 3D companies, we went out of our way not to position ourselves that way. We don’t care if it’s 3D or 2D, we care if it’s in Imax. So it doesn’t really matter. It is likely we’ll see reductions in those developing countries.”

Competitor RealD Inc., which is much more tied to North American box office fortunes, has slumped 33 percent this year. The stock fell 3.9 percent yesterday to $7.56 in New York, its lowest price since it went public in 2010.

Rich Heineman, a spokesman with RealD in Beverly Hills, California, said industry participants at all levels need to work together to ensure the continued health of 3D films.

Same Ecosystem

“This is an ecosystem and everybody needs to collaborate,” Heineman said in a phone interview. “When we put everything together we do believe 3D is a compelling experience.”

Heineman declined to discuss the RealD’s share performance.

Presenting films at TIFF and the Cannes Film Festival, as well as theater installations planned for Empire Leicester Square in London adds to the company’s standing, Gelfond said.

Along with “Gravity,” starring Sandra Bullock and George Clooney, Imax is showing “Man of Tai Chi,” a martial-arts film that marks the directorial debut of Canadian actor Keanu Reeves.

“In the entertainment industry Imax is well-known, but on a broader consumer scale seeing Imax in iconic locations will hopefully attract consumers,” Gelfond said. “It’s the first time we’ve had a presence at this festival and it’s appropriate for a Canadian-based company; we’ve finally arrived home again.”

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