Imax Will Continue To Benefit From Box Office Rebound

Senior Equity Analyst

Neil Macker

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In the middle of the 2000s, Imax reinvented itself by embracing the digital video revolution, allowing the firm to digitally remaster blockbuster films into its proprietary large-screen format. Imax is now the dominant player within the premium large-format cinema marketplace and, in our view, has carved out a narrow moat.

Imax has leveraged its format standards and technologies, including its projection systems and digital film conversion process, to capture over 50% market share within the premium large-format cinema marketplace. This switch to converted Hollywood films from films shot only with Imax cameras helped the firm expand from 210 theaters in 2008 to over 1,630 in 87 countries in 2022, increasing the annual Imax releases from 13 in 2007 to 68 in 2022. Imax is now primarily a technology hardware and brand-licensing company that does not operate the vast majority of Imax theaters. Instead, the firm generates revenue via selling and leasing the required proprietary equipment and via fees for digitally remastering standard films into the proprietary Imax format. While expensive, Imax screens boast average annual gross revenue of around $880 million in the U.S., well above the per-screen average of traditional screens.

A higher percentage of new theaters for the company now fall under a joint revenue-sharing arrangement, under which Imax receives a larger percentage of box-office receipts (typically 19%-20%) versus a traditional sales-lease agreement. We believe that most of these agreements (generally 10-year terms with three- to five-year renewal options held by theater owners) will be renewed, but the first real test of this thesis will not occur until 2023.

While Imax has a global footprint with screens in 87 countries, the firm remains highly leveraged to China and the U.S., which comprise 48% (778 screens) and 22% (364 screen) of the total 1,633 screens, respectively. Despite the relatively high number of screens, Imax has a 204-screen backlog in China, demonstrating the still-large opportunity. However, the firm’s long-term expansion plans will occur outside its two key markets, in places like Latin America (55 screens) and Asia ex-China (138 screens).

Business Strategy & Outlook

We assign Imax a narrow economic moat based on its format standards and technologies, including its projection systems and digital film conversion process. The firm has leveraged these assets to become the dominant player within the premium large-format cinema marketplace. Imax is now primarily a technology hardware and brand-licensing company that does not operate the vast majority of Imax theaters. Instead, the firm generates revenue via selling and leasing the required proprietary Imax equipment and via fees for digitally remastering standard films into the proprietary Imax format.

Imax largely serves two client bases: movie theater owners and film studios. For the theater owners, the company offers a number of products and services via a sale, sales-type lease, or joint revenue sharing arrangement, with the majority of newer agreements being either leases or JRSAs. The lease agreements generally have a 10-year term, with five- to 10-year renewal options held by theater owners. Under the lease agreement, Imax receives an initial fee upon installation, along with annual fees based on box-office receipts and ongoing maintenance and warranty fees. 

The JRSA features a minimal initial fee in exchange for a larger percentage of box-office receipts (typically 19%-20%) with a 10-year term, with three- to five-year renewal options held by the theater owners. The JRSA agreement allows theaters owners to add or convert to Imax theaters with a much lower capital expense, as well as helping the company expand the overall network to over 1,630 screens, of which 57% fall under JRSAs. The company has signed JRSAs with 43 partners and has over 280 JRSA screens in its worldwide backlog. Imax typically signs JRSAs with theater owners with stronger balance sheets and in geographies with lower political risk. While expensive, Imax screens boast average annual gross revenue of almost $525 million, well above the per-screen average of traditional screens, with the average in the U.S. at over $880 million. We believe this increase in revenue and attendance also drives additional concession revenue, increasing owner interest and retention, thus creating a network effect. 

Beyond JRSAs, Imax increased its market presence with the introduction of digital screens and digital remastering (branded as DMR). The move to digital projection in 2008 allowed the firm to expand from 210 commercial theaters in 2008 to over 1,420 today and to increase the number of Imax films from 13 in 2007 to 70 in 2018. The switch also lowered the film delivery cost to $100 per movie per system, versus $30,000 per 2-D analog print or $60,000 per 3D analog print. Imax lowered the conversion time for a film from 16 weeks to one week, allowing Imax DMR to be released at the same time as standard films in multiple markets. The lower delivery cost and increased network size spurs additional interest from studios, which in turn helps to increase the attractiveness of the theaters. Imax charges a 10%-15% fee (depending on geography) of the gross box office to convert films to its proprietary format via DMR. The fee also covers access to the firm’s distribution and marketing platform and the right to use the Imax logo in marketing. Movie studios help spread the Imax brand by placing the company’s logos into the marketing for their high-profile blockbusters, as consumers have demonstrated a willingness to pay higher ticket prices for the Imax experience. In addition, a number of blockbuster directors shoot a portion of their films with Imax's proprietary cameras. This provides some of measure of lock-in to the Imax format and encourages studios to convert films via DMR. Similarly, this lock-in around Imax’s proprietary cameras provides the firm with a barrier to entry in keeping other upstarts out of the space. 

Movie studios also trust Imax with their films prior to the movie premiere, which demonstrates a high level of trust, given the potential impact of any piracy. We believe that new entrants, particularly those with no prior history in the industry, would find this lack of access to be a high hurdle. Blockbuster movies tend to earn the majority of their box office within the first month of release, and so the ability to convert a film and release it at the same time as the standard version is very important.

While the pandemic accelerated the secular decline in movie theater attendance, Imax remains somewhat insulated when compared with its theater chain customers. Imax generally generates 80% of its revenue from the top 20% of movie theater locations. Additionally, Imax generally rotates its films within a month or less of launching, making the service less vulnerable to the shorter exclusive theatrical window. Despite the decline in the number of movies released in the U.S. over the decade, Imax remains easily able to fill its slate and has increased its size by focusing on local language films in China, India, and other markets.

Narrow

Economic Moat

IMAX

IMAX Corp. is an entertainment technology company, which engages in the business of motion picture technologies and presentations. It operates through following four business segments: IMAX Technology Network; IMAX Technology Sales and Maintenance; New Business Initiatives; and Film Distribution and Post-Production. The IMAX Technology Network segment represents box office results and which includes the reportable segment of IMAX DMR and contingent rent from the joint revenue sharing arrangements and IMAX systems segments. The IMAX Technology Sales and Maintenance segment includes the sale and installation of theater systems and maintenance services, primarily related to the IMAX Systems and Theater System Maintenance. The New Business Initiatives segment involves content licensing and distribution fees associated with the firm’s original content investments, virtual reality initiatives, IMAX Home Entertainment, and other business initiatives that are in the development and/or start-up phase. The Film Distribution and Post-Production segment provides licenses film content and distributes large-format films, primarily for its institutional theater partners. The company was founded by Graeme Ferguson, Roman Kroitor, Robert P. Kerr and William Shaw in 1967 and is headquartered in Mississauga, Canada.

Earnings data Q2 2023

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IMAX Corp. is an entertainment technology company, which engages in the business of motion picture technologies and presentations. It operates through following business segments: IMAX Technology Network, IMAX Technology Sales and Maintenance, and Film Distribution and Post-Production. The IMAX Technology Network segment includes the IMAX DMR segment and contingent rent from the JRSA segment. The IMAX Technology Sales and Maintenance segment refers to the IMAX Systems, IMAX Maintenance, and other theater business segments, as well as fixed revenues from the JRSA segment. The Film Distribution and Post-Production segment relates to the distribution of large-format documentary films. The company was founded by Graeme Ferguson, Roman Kroitor, Robert P. Kerr and William Shaw in 1967 and is headquartered in Mississauga, Canada.

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