IMAX Corporation (IMAX) Q1 2017 Earnings Report, Transcript and Summary

Good day and welcome to the IMAX First Quarter 2017 Conference Call. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Jessica Kourakos, Senior Vice President of Global Investor Relations. Please go ahead.

Good afternoon and thanks for joining us on today’s first quarter 2017 earnings conference call. Joining me today in our New York office is our CEO, Rich Gelfond; our CFO, Patrick McClymont; and our Head of Entertainment, Greg Foster, who will each have prepared remarks and will be available for Q&A. Also, joining us is Rob Lister, Chief Legal Officer and Head of Business Development. 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 first quarter release and the slide presentation accompanying today’s call have been posted on the Investor Relations section of our website. We also provide quarter-to-date box office results on the IMAX Investor Relations website every Friday with a one week lag. We have also have an Investor Relations Twitter account using the handle @IMAX_Investors that includes this box office disclosure as well as other items that maybe of interest to the investor community. Finally, I would like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward-looking and that they pertain to future results or outcomes. Actual future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. During today’s call, references may be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. Discussion of management’s use of these measures and the definition of these measures, as well as reconciliations to adjusted net income, adjusted EPS and adjusted EBITDA as defined by our credit facility, are contained in this morning’s press release. With that, let me now turn the call over to Rich Gelfond.

Thanks, Jess, and thank you all for joining us today. I’ll start with a few remarks about our core business, provide you an update on our new initiatives, and then pass it over to Greg and Patrick for more details around our results. We believe IMAX has undergone a remarkable evolution over the last several years, and network of over 1,100 commercial theatres now span 75 countries around the world, and that is not including the 500-plus theaters we currently have in backlog. And on the heels of record signings in 2016, our year-to-date 2017 momentum is showing no evidence of slowing down. We signed agreements for 38 new theaters in Q1 and have already seen an additional 65 signings so far in Q2 as a result of two strategic deals from Omnijoi in China and ODEON in Europe. That brings our year-to-date signings to 104 theaters, just four months into the year. This has definitely exceeded the expectations we had coming into the year. Not only has the volume of signings been impressive, but the diversity of signings from a geographical standpoint has also been great. We’ve signed agreements across the U.S., China, Europe, and India, underscoring the strength of our global momentum over the past 18 months. I would like to highlight a few of our recent deals, starting with an 11-theatre agreement, we announced with Regal in January, which also came with a two-year extension of our lease terms across all of our Regal theaters, both new and existing. As a result, the leases on our first Regal theaters do not begin to expire till 2021. Also by the time our Regal theaters begin to come up with renewal, our commercial laser products will be available. Omnijoi also marks another strategically significant deal. As a result of the 40-theatre hybrid revenue sharing deal signed this week, Omnijoi is now our third largest partner in China and fifth largest globally. Omnijoi, which is a state-owned entity and part of the Jiangsu Broadcasting Corporation is one of the premier exhibitors in China and a longstanding partner of ours, which needless to say, we were thrilled to see them continue to leverage IMAX as an anchor attraction for new developments. The other agreement I would like to highlight is ODEON. This one is particularly important, given the strong PSAs we have seen out of Scandinavia, the UK, and broader Western Europe. As part of this deal, we plan to add roughly five theaters in Germany, a country that currently has only two commercial IMAX screens. Penetrating this market has been slow thus far given the general lack of competition in the IMAX business. Since announcing this agreement, we have already seen increased interest from additional players in the market. Other areas of interest are Spain and Italy, where we currently have a combined footprint of five theaters. Our ability to add new reference theatres that can build the IMAX brand further in these regions presents a great opportunity for us. All in all, the ODEON deal significantly expedites our signings and penetration in several key markets, which if history is any guide, should facilitate future signings and installation momentum. And as I’ve said before, most importantly, we believe these signings are key drivers to future earnings growth, particularly when you consider some of the highly anticipated films that lay ahead. In our core business, as many of you know, the scale of our theater network allows us to capture more box office than before and positions us well for the highly anticipated 2017 film slate and beyond. And while we’re still in the early stages, we’re encouraged by many of the results so far. Greg will walk you through the box office trends in more detail, but I’d like to take a moment to highlight a few key items. First, it’s important to keep in mind that last year’s first quarter was record-setting, led by the one-two punch of Star Wars episode seven, which had strong legs well into January and Deadpool. When coming – when put in context, we’re pleased with how Q1 box office momentum picked up with a number of hit titles, including Logan, Kong, and of course, Beauty and The Beast. But as we look ahead, given the promising slate, we expect box office to grow each quarter over last year for the rest of the year. In fact, just last weekend, we kicked off the start of the blockbuster season with Fate of the Furious, which generated an impressive $30 million in box across 1,079 IMAX screens in its opening weekend. This title marked our fourth largest opening ever and kicks off what we believe could be an exciting nine-plus months full of tent-pole titles. On the topic of box office, I would like to provide some further color on what we’re seeing in China. Despite difficult comparisons to last year, we were encouraged this quarter with regards to the performance of local language films and some smaller titles, in particular. We achieved $18 million in IMAX box office on Journey to the West 2, $12 million on xXx, and $10 million on Kong Skull Island. And just last weekend, we grossed $14 million on the highly anticipated Fate of the Furious. In fact, IMAX screens accounted for 83 of the top 100 screens for the films released in China. Not to mention, it was also our second biggest three-day weekend ever and generated 45% more box office than Furious 7 over the same period, which is our largest film of all time in China. While currency and ticket prices worked against us in 2016, I’m pleased to see the RMB has been relatively stable and ticket prices are improving versus last year. From a signings perspectives, we continue to set new records, with 71 theaters already having been signed year-to-date in the region and no indications of a slowdown in instillations, as exhibitors gear up for the strong movies schedule ahead. All in all, given our vast global network, record backlog, and long-term slate deals, we believe that we are strongly positioned to capitalize on the robust slates ahead, and we look forward to seeing these films play over and over during the course of the year and beyond. Turning to some of our new initiatives, I’m very pleased at the progress we’re making in two key areas; virtual reality and original content. Looking first at our virtual reality initiative, our LA facility, which has been opened for roughly three months now has seen over 20,000 unique visitors. From a revenue standpoint, the center is pacing at roughly $15,000 a week over the last month or so, including our highest grossing week to-date this past week and continues to exceed expectations. We plan to open additional pilot VR centers in New York, Shanghai, Tokyo, and Manchester in the UK. And we’ll continue to use these sites as pilots to ultimately determine the longer-term opportunity at hand. But we’re definitely encouraged by the initial results from our LA facility. Ultimately, we believe the success with this venture will be driven largely by the quality of content that we’re able to deliver to consumers. And on that front, we’ve taken significant first steps to curating and delivering new and engaging content to our centers. As many of you probably saw, we signed our first new content deal with Warner Brothers, which we hope to capitalize through our virtual reality content fund, which is expected to produce roughly 25 pieces of content. This deal facilitates the release of three unique pieces of brand new VR content, including Justice League and Aquaman. Similar to theatrical windows, this content will have an exclusive window at IMAX VR centers, prior to being launched more broadly in home, will also generate revenue, given our stake in the content. We anticipate a number of deals similar to this one, advancing through the pipeline in coming months, so please stay tuned. Moving on to a regional content business, filming with IMAX cameras from Marvel’s Inhumans began this past March in Hawaii, and we’ve recently wrapped the first two pilot episodes. The initial reactions from those involved, including Greg who is on set in Hawaii have been very positive. And we’re all very excited to note that this is already one of the most talked about fall shows of the upcoming broadcast season. Our partners at Marvel and ABC are terrific and we look forward to launching this exciting series in September. All in all, we believe the content, such as Inhumans, has great potential, not only to fill in in the shoulder periods with strong alternative content, but also to drive meaningful upside for our business in the form of the new revenue and profit streams over time. Also, the fact that this content can only be seen in IMAX theatres could accelerate IMAX signings and installations, as it showcases the synergies this new business could have with our core. We intend to pursue investments in other pieces of original content and have already seen encouraging interest from various content creators looking for way to eventisize the launch of television content. Over time, we can envision doing two or three of these original content investments per year in shoulder periods during our calendar year. And as you’ve seen with our Marvel deal, which we were able to mitigate some risk by ABC’s full season pickup of the show, demonstrating that we plan to make these investments in a disciplined way, not betting the farm on anyone project and leveraging our studio partners strengths where appropriate. We look forward to providing a lot more detail on these new businesses, as well as updating you on our core business at our Investor Day in Los Angeles on May 11, so we hope you can all join us. Without spoiling the event, we do intend to have a VR tour as part of the day, along with some interesting guest speakers to speak about some of these new opportunities as well. All in all, the recent momentum we’ve witnessed across the various facets of our business with a theatre signings, network expansion, long-term field, film deals, demand for IMAX cameras, or new business content deals among others, it’s a very exciting time at IMAX. With that, I’ll kick it over to Greg to review the film side of the business. Greg?

Thanks, Rich. As I mentioned on our call in February, we certainly have a lot to look forward to this year. In Q1, we delivered $212 million in global box office, 65% of that coming internationally. Specifically, $75 million came from the domestic market, $70 million from Greater China, and $67 million from other international locations. Our PSAs across these regions were 187,000, 175,000, and 211,000, respectively. Compared with Q1 of 2016, PSAs rose 8% in Japan, 15% in Taiwan, and 27% in Russia. It’s worth noting that nine of our top 20 international box office locations in Q1 were in Japan, a market that we’ve spent a great deal of time developing and nurturing, and it looks like it’s begun to really pay off. We’re also still very underpenetrated in Japan, where we currently have 28 theaters installed. But we believe the opportunity to be roughly 75 showing some real upside. We have strong titles in this quarter like Beauty and The Beast, Logan, and Kong Skull Island. But the second quarter is really where we expect to see our film portfolio kick into high gear. As Rich mentioned, last weekend we saw impressive results on Fate of the Furious, which did a total of $30 million plus globally in IMAX and broke numerous IMAX records. Fate of the Furious was our number one opening ever in India, the UAE, Qatar, Belgium, and Egypt to name a handful. We also saw terrific per screen averages in Sweden, Angola, Puerto Rico, and Denmark, which did 120,000, 103,000, 72,000 and 63K per screen, respectively. From this point forward, not only do we have a very encouraging line up, but the spacing of the films, which is very important to us is ideally paced for our single screen network. Next up is the much talked about Guardians of the Galaxy Volume 2. Personally, I saw the film several weeks ago, and I’m incredibly enthusiastic about it, not only from a marketing point of view, but also just in terms of how well the film plays. It’s also important to note and in keeping with our commitment to showcase IMAX DNA in 2017, Guardians 2 has been designed from inception by Director James Gunn and Marvel Studios to include significant portions of the film exclusively enhanced for IMAX’s expanded aspect ratio. In Layman’s terms that means there’s almost 30% more image seen in IMAX during the film’s big action sequences. We always talk about our direct relationships with filmmakers, and I think this recent quote from Guardian 2 Director, James Gunn is particularly relevant. “Those who have followed me awhile know that IMAX is the optimal way to view a Guardians movie. I personally oversee the 3D crafting every shot. And only in IMAX do we shift aspect ratios during big scenes, so that you get nearly 30% more screen size than anywhere else. Unlike many other films today where screen size shifts and 3D are afterthoughts, we plan our aspect ratios during the script stage, and every single shot is tailored for 3D as we shoot it. I’m glad that we’ve been able to partner up with IMAX from the moment of its conception.” This tech trend continues and we’re seeing more and more demand for IMAX cameras and enhanced aspect ratios as a differentiated tool to distinguish our experience for the consumer. As I noted on our last call, we anticipate having approximately 10 films this year that feature IMAX DNA either through directly filming with our cameras or leveraging our unique aspect ratio. In June, we have DCM, Warner Brothers, Wonder Woman, and then Paramount’s Transformers for which Michael Bay has made IMAX cameras a key part of the films design. In fact, more of this film has been captured in native IMAX 3D than any other. And we think Michael for continuing to be such a great partner and champion of IMAX. In July, we have Spider-Man Homecoming, which Life Guardians 2 is produced by the Marvel Studios banner. Two weeks after Spider-Man is Chris Nolan’s new film Dunkirk, the vast majority of which was filmed with our classic IMAX film cameras by Chris. For those not at CinemaCon, Chris show that Dunkirk prologue, which included stunning footage for this film and the reaction was off the charts. After 13 years of partnership with Chris Nolan, we never take his support for IMAX for granted, and he truly makes us a better company and better at what we do. In fact, it’s worth noting that at CinemaCon, the two films on the variety buzz meter that reached the top were Dunkirk and Blade Runner 2049, a film that comes out in IMAX this fall and is directed by Denis Villeneuve. As you know, filmmaker relationships are a big driver of our business. And in 2017, we’ve said we believe an example of a new generation of IMAX directors who have been joining the fold. Specifically, Academy Award winning director of La La Land, Damien Chazelle, Denis of Blade Runner 2049, and Ryan Johnson of Star Wars Episode 8: The Last Jedi, which as we previously announced is being filmed in part with IMAX cameras. Switching gears for a moment, in September, we will launch Inhumans, which Rich pointed out, just finished filming the pilot episodes in Hawaii. The cast of Marvel and ABC put together is outstanding and their announcements have generated a ton of social media buzz, with 95% of the social engagement being positive. That’s particularly impressive since no one has actually seen footage, at least, publicly. Couple that with the fact that the pilot episodes were filmed exclusively with IMAX cameras, which again highlights the cinematic scope of the show. And I think it’s safe to say that, we’re all very eager to launch this groundbreaking television series with our partners at Marvel and ABC. I spent a couple of days on the set in March, and was very impressed with the size and scale of the production. From the director Roel Reine to the sets, to the production design, all aspects of the pilot episodes have been conceptualized with IMAX clearly front and center. The dailies look fantastic, fan anticipation is high, and we’re on schedule to deliver what we hope will be an epic adventure this fall. With roughly 500 scripted shows available for consumption this year, they need to differentiate and eventisize a new television series, is becoming increasingly important. We believe this presents an interesting opportunity for us and look forward to premiering Inhumans across the global IMAX theatrical network this September. And without going through every film, given the shared number of them, we’re also looking forward to a handful of other titles, such as Blade Runner, as I mentioned, Marvel’s Thor: Ragnarok, D.C.’s Justice League, and Star Wars Episode 8, the The Last Jedi, which you can bet, we’ll start talking about more detail on the next earnings call. Also keep in mind that we have long-term film deals in place with virtually every major studio, including our recent announced deal with Disney, which is our first agreement with Disney that encompasses all of their studios, including Marvel, Pixar, and Lucasfilm. We also have a handful of local language films, including Bahubali 2 in India, which comes out on April 28, and is the sequel to the blockbuster, I won’t pronounce that again, but the first one of that series. All in all, we believe there’s no shortage of excellent content in 2017 and beyond. And although we’re not even halfway through the year, we already have a large portion of our schedule set for 2018, which looks to be a year of big potential blockbusters. And for what it’s worth, our initial view into 2019 also looks strong, with several tent-poles already confirmed. So with that, I will now turn it over to our CFO Patrick McClymont.

Thank you, Greg. Good morning, everyone. We appreciate you joining us. As Rich and Greg mentioned, 2017 is up to a good start in terms of growing our network. Year-to-date, we have already signed a record 104 agreements for new theaters, building on the strong signings momentum witnessed last year. We’re also encouraged by the geographic diversity of these signings, which continues to underscore the significant potential in China, as well as the acceleration of signings activity in other parts of the world, such as Europe. Looking at this in a bit more detail, in the first quarter of this year, we signed agreements for 38 new theaters, headlined by our recent 30-theater agreement with Bona Film Group in China. And in Q2, we have already signed agreements for an additional 65 theaters. On the installation front, we installed 14 new theater systems ahead of our Q1 guidance of 10 theaters. Geographically speaking, nine of the new Q1 installs were in China, while the remaining five installs were in domestic and other international markets outside of China. If you turn to Slide 5 of our earnings presentation, you’ll see the breakdown of our 14 new installs in Q1 by theatre type. Before I dive into some of the numbers, I’d like to remind everyone of the recent changes to some classifications within our MD&A section. As I’m sure, many of you have seen on Tuesday evening, we posted a historical model in a downloadable Excel file, which is located on our Investor Relations website. This Excel model reflects the new breakout within our MD&A for the last three years and provides historical data on box office, PSAs, and our network footprint by region. We also intend to update the model with actuals on a quarterly basis, starting with Q1 2017, which we will update later today. As I previously mentioned on the Q4 call, one of the key changes is that, our hybrid upfront revenue is now being broken out separately and included in the theater business. We believe the structure simplifies our revenue breakdown and better illustrates how we view and value the business today. The network business, which includes JRSA, DMR, and rental revenue, is a large and quickly growing asset-like global network that delivers recurring earnings and high margins. We believe the value and earnings potential of this business is now more clearly demonstrated as a result of these changes. While we’re not immune to the transitory box office fluctuations over a longer time horizon, the value creation of this business largely stems from our ability to grow the network. And looking at this business over the past three years, it is operated in a 70-plus margin range. So factoring a backlog of 500-plus screens, the majority of which should be rolled out in the next few years, we believe the earnings power that exists in this business could grow quickly in the near-term. The theatre business is a high value-add engineering services business that provides project-related revenue associated with system sales and fixed recurring revenue, such as maintenance for our various deal structures. Moving on to the core P&L, network business revenue was $39.3 million in Q1 and generated margins of 72.2% compared to $52.3 million and a 79.3% gross margin in the year-ago period. Margin contraction in the network business was primarily driven by lower box office, which was down roughly 22% year-over-year, while costs remained relatively flat. The box office decline was mainly from China. Theater business revenue was $23.2 million in the quarter and generated a gross margin of 45.3%. This compares to revenue of 35.1% – $35.1 million and a gross margin of 30.1% in Q1 2016. Please note that we had just one theater upgrade to our GT laser system in the most recent quarter compared to nine upgrades in Q1 of last year. We have over 1,500 basis points of margin improvement was mainly driven by the fact that we had eight fewer upgrades in the quarter, which of course, come at lower margin and new system sales. Other business revenue, which primarily consists of our institutional revenue, theater operations, and post production was $4.8 million in Q1 flat versus the year-ago period. Before moving on to operating expenses, I’d like to mention that we incurred an asset impairment charge in the quarter of $3.4 million related to our institutional distribution business, reflecting or taking a more conservative assumption on ultimate revenue from a documentary film. This was worth film we invested in through the documentary film fund of which we are the general partner and we had outside investors. Because we consolidate the full results of the fund, the full value of this write-down is reflected in gross margin on our income statement. However, the net result of this impairment to our bottom line was $1.5 million, because we attribute roughly $2 million of the write-down to the other investors in the documentary film fund. This shows up on the income statement just below net income as part of the attributable to non-controlling interest lines. Normally, this line is a negative number, as we are typically attributing out income from the China business to the minority shareholders of IMAX China. This quarter, you’ll see it as a positive number as we were attributing out the loss from the impairment, which more than offsets the income from China for the quarter. We do not anticipate any further asset impairments associated with our distribution business for the remainder of the year. First quarter 2017 core operating expenses, which includes R&D and SG&A, excluding stock-based compensation was $30 million versus $26.7 million in the prior-year period. As you can see on Slide 7, our core business continues to generate meaningful returns and positive cash flow. Excluding non-controlling interest, adjusted core EBITDA for Q1 was $23.3 million, bringing EBITDA margins to 34.6%, respectively. Adjusted core EPS was $0.09 for the quarter. Now turning to our new initiatives. New business revenue in Q1 was $1.3 million, primarily driven by a reimbursement payment from Google related to the development of our cinema grade VR camera and our location-based VR operations. While we’re still in the pilot stage of VR, we are encouraged with the top line performance of our flagship LA VR facility and we’ll continue to closely monitor the economics of the additional VR Center that are scheduled to open this year. Total operating expenses from new initiatives was $2.1 million in Q1 versus $1.8 million in the prior year. On a year-over-year basis, new business R&D was driven by the development of our VR camera and digital distribution platform, which was primarily offset by lower spending on the home initiatives. Adjusted negative EBITDA for the new business was $2 million in the quarter. Now, let’s move on to our consolidated results, which include minority interest in IMAX China. Total Q1 operating expenses were $30 million. Consolidated adjusted EBITDA was $18.5 million in the quarter. Consolidated adjusted net income was $3 million, reflecting a Q1 tax rate of 22.5% and adjusted net earnings came in at $0.06. On the balance sheet side, we ended the quarter with $190.5 million of cash on hand. That concludes our first quarter 2016 sic [2017] financial results. Next, I’d like to briefly review our financial outlook for the second quarter. Starting with installations, we expect to install roughly 28 new theaters in Q2, of which we anticipate 10 STLs, 15 JVs, and three hybrid JVs. We now expect to install approximately 160 new theaters for the year, up from our original 2017 guidance of 150 to 155 new systems. The balance of our guidance is consistent with what we laid out on our Q4 call in February. A full breakdown of this guidance, which is broken out by core and new initiatives, we posted on our Investor Relations website at the conclusion of this call. Looking ahead to the rest of the year with the sustained global demand for IMAX theaters driving the heightened levels of growth in our network, we remain well-positioned to capitalize on what is a robust portfolio films still to come during 2017. We also look forward to seeing many of you at our Investor Day on May 11. For those of you unable to attend, we plan to webcast the event with accompanying slides available online. With that, I’ll turn it over to Q&A.

Operator?

Thank you. [Operator Instructions] We will take our first question from Eric Handler from MKM Partners. Your line is open. Please go ahead.

Yes, thank you very much and good morning. Rich, quick question, you talked a little bit about the documentary film fund, but you’ve got three various funds that you’ve deployed now. You’ve got the documentary film fund, but you also have the China Film Fund and then the VR fund, I guess, the first content piece you’ve got there is the Warner Bros film. How much capital have you deployed from these films? And how much do you expect to deploy over the next 12 months? And sort of like this – can you just give us the status of each of those funds?

So the VR fund, as you’ve said Eric, we have our first commitment now. And as you know, we have co-investors in that fund, and we haven’t finalized the Warner agreement yet. But the total amount of investment in the fund is about $3 million to $4 million per film, and we only have a small percentage of that, because there are co-investors in the fund, including IMAX China. In the IMAX film fund, we haven’t gotten all the necessary approvals yet in China. But we intend, we have projects that we’re ready to go in and our contribution of the overall commitment is $25 million and roughly $110 million fund, but none of that is out yet. And in the documentary fund, the only investment was this film with Patrick, referred to during his comments.

Okay. And any idea when you might be able to get approval by the Chinese government for the Chinese film fund?

We think shortly, but I would have told you that over the last three months, when I was told shortly, but it should be quicker.

Okay. And then just a quick follow-up, any updates with the WTO in China?

No updates. But again, I’m glad you asked that, because I’d like to just put it into context, I think there is some misunderstanding. So a number of years ago, it was found that China violated the WTO agreements in the way it handled film distribution in China. In the first round, there was an agreement by which roughly 35 films a year would be allowed in under the quota, and that the take rate by the studios would be about 25%. In that settlement, it was agreed to review it every five years. So now they’re in the process of reviewing it with the goal of how to get China on a par with other markets, meaning, no quotas and our market rates on film distribution. So although it’s not resolved, I’m – there’s only one direction this goes, which is more liberalizing of the China film market, eventually market rates for distribution eventually more films going in. So the context is how good it is and how quick a period of time. It’s not a context for getting worse. And we’ve heard from both the studio side and the Chinese side that things are progressing. Again, I’m not sitting in the room on the discussions, but my own educated guess will be that things will get better for Hollywood in this agreement than they are today.

Great. Thank you very much.

And we will take our next question from Alexia Quadrani from JPMorgan. Your line is open.

,:

So, Alexia, what we do is, we do an estimate for the size of each of these markets on a bottoms-up basis. And right now, our estimate worldwide is 2,450. That’s the number of screens we can penetrate, but we revaluate that on a regular basis, and we’re in the process of doing that right now. And I would hope by Investor Day, we’ll be able to talk about not only the world market size, but by country with new numbers. And again, just to remind everyone, we initially thought our opportunity in China was 90 theaters, and we now have, including our backlog about 800 theaters. So it’s something we reevaluate based on the demographics of the particular market, particularly disposable income. And although we haven’t finished the study, I would expect that the 2,450 would go up.

And is there a maximum amount you can do in one year?

No, that’s just a question of how much interest there is in a market, how many you sign, and then whether the multiplexes are open and are being retrofitted, or whether they have to be built out, but no, there isn’t. And just falling back on something Patrick said, our signings level was historically at about 125 a year. Until last year, we installed significantly more than that. And Patrick just told you that our guidance for this year is around 160. And that’s directly a result of increased signings around the world.

Thank you very much.

And we will take our next question from Aravinda Galappatthige. Your line is open. Please go ahead.

Good morning. Thanks for taking my question. Rich, I know you touched on the – you discussed the deal with Marvel’s Inhumans. How we can potentially expand? I was wondering if you can talk about how that model can be sort of built up over time, not just with other majors, but when you think about sort of maybe doing similar deals with smaller independents, which would -- independent studios, which would give you arguably a bigger equity stake and make it a – make you even a bigger player in that particular venture. Can you maybe talk about the various options that are available to you? I know, it’s a bit of a futuristic question. But I just want to get a sense of where heads at longer-term with that model?

So the theatrical underpinning of the Marvel deal is that, there are numerous pilots being made for television or streaming way more than there are used to be 500 or 600 a year right now. And that new programming has trouble breaking out of the pack and creating sort of a franchise. So the theory behind the Marvel deal was that, we would release the first two episodes and create an event around them, and that that would create awareness in a fan base and then eventually benefit not only the pilots, but the overall series the viewership and longevity. So we’ve been exploring other variants of that. So it doesn’t have to be on a TV network. It could be a streaming service. It could be a cable network on that side. On the other side, the content side, it could be a established IP. It could be new IP, the IP just has to sort of take advantage of IMAX’s fanboy audience and demographic of the younger viewers and also the scope of what IMAX provides. And then within that, we’re sort of mixing and matching to find what the right properties are and what the right deal is. So, going forward, if this is successful, I would expect us to do more things like this with Disney and with other broadcast networks. I think we do things with cable television, I think we do things with streaming, both domestically and internationally, and it’s in early days. And I’m somewhat surprised Aravinda, when we talk to reasonably senior people that a lot of people don’t even know that it’s going on. But I think over time, this is going to be a big opportunity for us. And I think, particularly for works, I think that will be a catalyst for short-term activity when it comes out in September.

Thanks, Rich.

So just to clarify one thing as you asked, could we do different deals with other players and maybe get to a bigger equity stake? It’s important to remember in this deal with Marvel, the way that works out is, we’re sort of 50-50 in terms of the money that we’re contributing, and because it’s their IP, they have a little bit of a promote, but we own in the low 40% range of this project. And so if you think about these as partnerships, I’m not sure you’re going to get to a very different outcome, where it’s around 50-50 and maybe there’s some economics swinging one way or the other depending on what people bring to the table. But we think this is actually a great model, where we’ve got a very meaningful equity ownership stake in what we think is a great project.

Okay, that’s quite helpful. And just related to that, is it going to be Q2, where we’ll see the – your investment in the cash flow statement?

Q3 is where most most will show up. There will be some marketing spend along the way that will hit the P&L starting in Q2. But the real economics from this will hit in Q3, when the project is launched.

Great. Thank you.

And we’ll take our next question from Stan Meyers. Your line is open.

Thank you, and good morning. So Rich, I wanted to focus a bit more on your network growth and kind of follow-up on Alexia’s question. Obviously, your installs exceeded expectations. You had another great quarter of signings. And we’re starting to see that this was balanced shift outside of China maybe to an extent based on your conversations around the globe, especially maybe in Germany, India, and maybe in Latham. Do you expect that over the next few years, we see screen growth kind of outside of China get close to that momentum that we’ve seen in China over the past few years, as China matures itself sort of, can we see that rebalancing?

So, Stan, I’m not being a wise guy about it. I hope not, because we’re doing really well in the rest of world, this is China, is on fire, it’s going gangbusters. So, if you would have asked me a year ago when we signed the big Wanda deal, would we have another 100 class in this shorter period of time? I don’t think so. I wouldn’t have thought so. And I think the box office things are going very well there. And I think, having a lot of people in your business is ultimately the thing. With that said, it is a worldwide thing. And one reason I’m so excited about what we did with AMC and ODEON in Europe, as I really think, they can help open it up. So one reason Germany has so few theaters even though their per screens are very attractive is, because there hasn’t really been competition in that market. ODEON was not in that market, so the people in there think they can own it for a very long period of time. Our experience in England, which was maybe seven, eight years ago, we had, I think, eight theaters in the country and ODEON was our only client at that time. And then other people who came into the business and now including the backlog, we have 50 in the UK. And I think that’s the important thing it’s establishing that dynamic. And I think it really can happen in Europe, and the Middle East has been going very strong. During the quarter, we signed a deal with Box to add on to their commitment, as Greg said in his remarks, Japan is doing extremely well. So, I think, the only reason it looks unbalanced in China is, because China is just off the charts. But we’re doing really well in other territories as well.

Okay. And then I had one for Greg, maybe we can spend a few more minutes discussing China. I know Rich mentioned ticket pricing improving there. Maybe you can talk about the film slate playing out there. Any discussions of the traditional blackout periods this year? Any initiatives from your end to drive attendanceor ticket pricing, just sort of, if you can give us more and more color on China and how that’s trending?

So this weekend, if it’s an indication of where we’re going in the future, we’re doing the happy dance. To do what we did this weekend on Furious 8 was amazing. As we know, China is difficult to predict at any given weekend. And so, we look at it more in terms of a long-term point of view than day-by-day, because that will make you crazy. What we do know is that, we have a series of titles that have been announced as being day and date on the Hollywood side over the course in the next two months that we’re thrilled about. Furious 8, obviously, was day and day, Guardians has been announced as day and day, there are a handful of other titles that are coming out day and date that I don’t want to mention, because I don’t think that they’re all official yet, but it looks like for the next couple of months a lot of movies that are opening in New York and Los Angeles will also be opening the same days in China. We have the July period, I don’t know if you can officially call it a blackout period anymore. But what we, because last year, there were some titles that all of a sudden showed up in the beginning of July when Hollywood titles didn’t traditionally show up. But as I mentioned in my earlier remarks, we’re very focused on local language titles, not only in China, but in places like Japan, in places now like India, and some other markets, China, obviously, is a huge part of it. And we’re not only focused on the local language titles, but we’re also focused on the marketing efforts. The local language titles are very important for us in two or three in four cities in particular where local language films tend to do even better and are a bigger part of the percentage of the box office there. So our marketing team in China is working very closely with a lot of the marketing organizations in China like M Time, et cetera like Wanda, like some of our other partners, and we’re spending a lot of time focusing on how we increase our market share there. And obviously, the amazing work that our network guys are doing in terms of growing the size of the network is only going to help our kind of leverage and marketing power there.

And we will take our next question from Matthew Brooks from Macquarie. Your line is open.

Good morning, guys. I wonder can you say anything about the new business revenues, maybe where they came from, whether it’s safe to be at home contributing there?

Sure. The biggest contributor would have been, as I mentioned, the payment from Google, which is related to the research that we’re doing on the VR camera. And then as we’ve talked about, we’ve had 20,000 folks come through the flagship VR Center in Fairfax – on Fairfax. And so the – there’s revenues associated with that as well, those are the two biggest drivers.

Will there be more payments from Google in the future, or you just get the one and that’s it?

So I’d say, as we continue to do the R&D work, we get regular payments from Google.

Okay. Thanks. And on the documentary film funds discussion you had earlier, are you able to tell us how much did you invest? I think you said you only invested in one film so far, and it’s led to a write-down, which looks like a pretty big chunk of how much would have invested?

Sure. Just one moment, I’ll get to that number. So the fund of which we are one of the partners invested $5 million in this project.

Dealing with the delay of Avatar 2, would you expect that some changes to the other movies in that next year might move, given there’s a little bit of a gap at the end of next year?

So that’s already happened. I’m sure you noticed that Aquaman moved from October to December of 2018. And my instinct would be that that’s a direct result of that. The schedules are always changing. It’s one of the things that that I’m finding more fascinating than ever even though the movies are – the production cost of these movies are going up all the time. There’s still a tremendous amount of flexibility in the schedule based on a title or two anchoring a certain period of time and when that title or two changes. It creates a cascading effect, where a bunch of other moves are made accordingly. I think it’s still too early to see exactly what’s going to happen in the future, as we get into 2019 and 2020 based on everyone, obviously, wondering what’s going to happen with Avatar 2 and when it’s going to come out. They’re going to wait probably for that declaration would be my guess, it’s purely a guess and speculative, and then they’ll be some other titles that are moving in. But when you look at the schedule in 2018 and 2019, it’s remarkable how many have already been identified, big, huge tent-pole titles. There’s always changes and again, the changes have a domino effect, but a lot of the anchored tenants have already been announced.

[Operator Instructions] Our next question from – comes from Michael Ng from Goldman Sachs. Your line is open.

Thanks. I have one for Greg and one for Rich. First, for Greg. I think there’s a one-month gap on the slate – in the slate between Dunkirk and Inhumans, is that right? And if so will Dunkirk be shown for an extended period of time, or are there other films you’re working on? And then for Rich, can you just give us an update on your recliner and rocker initiatives? What do you see happen to IMAX attendance when you install recliners? And does it make sense economically to deploy and who pays for it, when rocker or recliners install that are excellent? Thanks.

So on the August front, Dunkirk opens up domestically in most markets on July 21, August is always – August is not the month that big tent-pole blockbuster movies come out. So our strong hope and sentiment is that, we’ll be playing Dunkirk for a long period of time. Obviously, we’ll see where things are as we move into the middle and part of August. But if you can find a big huge blockbuster for August 25, I’ll give you my – I’ll text you my cell number, because there hasn’t been one in the 16 years that I worked at IMAX, and that’s part of the reason by the way, why Inhumans is coming out September 1. The whole original content strategy is – was initially conceived as gap fillers, as an opportunity for us to fill in content at times when studios just simply don’t release big Hollywood titles. So I hope that answers that question. Rich, over to you on the other one.

On the seating, the theaters own the infrastructure not us. We provide the technology and a number of them are testing different kinds of seats in IMAX theaters. In the early going, it’s looking like recliners are probably not a great move for IMAX theaters, because they affect capacity so much and IMAX does so much of its capacity on the opening weekend or the second weekend. In the limited experiments we’ve done, rockers seem to be very good and an improvement. For example, the Lincoln Square here in New York City, it affected our – we didn’t lose that many seats to put them in. For those of you aren’t familiar, it’s kind of like the top of a recliner without the bottom of a recliner. So they’re more comfortable and our box office has gone up, but they don’t really affect capacity very much. We still testing, I think something like 25 more places to go the remainder of this year and looking at it, but that’s our only views.

Great. Thank you. And my understanding is recliners take out about 50% of capacity. What’s the reduction for rockers?

I think it’s about 15%, 20% something like that.

Thank you.

And we will take our next question from Jim Goss from Barrington Research. Your line is open, sir.

Thank you. Rich, I wonder if you could talk about India and the shift in terms of film pace and receptivity to your Hollywood product, and any other political and business climate issues that make involvement more there more desirable to you than seem to be the case a few years ago?

Well, I would say, what’s helping us there, Jim, are two things that play out in the rest of world as well. One is the box office and our PSAs are pretty strong there, especially given the currency differential. We get a hefty price premium and I don’t remember there’s less than 10 open. But most of them are doing – most of them are free pretty good, I guess, there are 11 open I’m looking up now and nine in backlog. But the real change in the last two years has been the number of competitors in that market. So there’s PVR, there’s INOX, there’s Cinepolis, and there are some other local players. So you couple the good results with competition, I’m definitely feeling better about that market, as Greg said, and I’m not going to attempt to pronounce it. We’re doing in Indian language – on Indian local film later in April there. So there are seeds of things turning around there and looking a lot better. In terms of the macro, I don’t have a great feel for it, Jim. There’s still some countries specific issues. I remember maybe 10 years ago, I used to get the question a lot that which you’re going to grow quicker in India or China? And China is now 800 putting the backlog in India is 20. So, obviously, the bet then, but I think things are starting to change. And do I think we’ll have 800 theaters in India soon? No, I don’t. But do I think things are going to continue to improve? Yes, I do.

Okay. If I may ask one other unrelated thing, are you envisioning the marketing of some of your VR content to other VR service providers as sort of a second window?

Yes, I think, we went through that a little in the prepared remarks, but we invest in content typically that will be a first release window. I think of theatrical as an analog. And then just like in the movie business, there’ll be a cascade. So it will go on different platforms into the home and that’s definitely the way the deal is structured, because obviously, the market is too small right now to recoup across one window.

All right. Thanks so much.

Thanks, Jim.

And we will take our next question from Steven Frankel from Dougherty. Your line is open.

Good morning. Patrick, I wonder if you might address what steps, if any, the company taking to improve its efficiency in the core business and help drive operating leverage?

Sure, happy too Steve. Look, I think the first thing what we’ve done is changed the conversation internally and externally, where we’re always talking about the core business very separately from the new initiatives. And that’s allowing us to have much better clarity on where we’re spending the money, allowing us, I think to have more discipline around the new projects and making sure we hold ourselves accountable on that. And then on the core business what we’re doing is, we’re recognizing that this is a business that has grown at an exponential rate over the last decade and [Technical Difficulty] internal systems and procedures and tools. This business has outgrown [there you implement], [ph] and we need to come up with a new approach. And so we’re going through sort of our big areas of cost and trying to identify what are the things we can do differently. And two examples, I would use. One is, on the information technology side, we’re spending a lot of the time and effort right now looking at how IP works, how it supports the business units that we’ve implemented a SAP platform three-plus years ago. We’re still not realizing the benefits of that. We’re still doing a lot of things the old fashioned way. And so that’s one big initiative is trying to give the business leaders and the people sort of on the front lines a better set of tools. The other one is, what we call, our digital supply chain, which is how we manage the content we receive from studios sort of from the moment we receive it to the moment it shows up on screen. And so we’re looking at every step of that process and it’s a complicated workflow. And we’re adding a lot of value to the content, obviously, sort of one of the most important elements of our business. We think there’s opportunities to streamline it. And the clearest example of that is at the very back-end of that supply chain, where just recently we’ve launched a pilot program to start transitioning from delivering content on hard drives, delivering it over the Internet. And so we’ve done that in our owned and operated theaters on a test basis, and we’re talking to our exhibitor partners about rolling out the same kind of system. And so that would allow us to take out a lot of variable cost that would create process efficiencies and would also be a better service to our clients. So we’re looking at projects like that as ways to extract costs from the system.

Okay. Let me sneak in one more quick one for you, if I can. The DMR margin in the quarter looked higher than I would have thought, given the level of box office. Is there anything that drove that in particular this quarter?

No, no. I think it’s just the fact that there is a bigger network. And so we do get those leverage efficiencies, because elements of the DMR process are not variable. Some elements are variable when we’ve got versions and we’re doing things in local language or in different languages. And so there are some variable costs associated with associated network, but a lot of it is pretty stable. And this quarter we did happen to have just the way that the slate worked out. We ended up with less versions than we’ll see in certain other quarters.

Okay, great. Thank you.

And our next question comes from Darren Aftahi from ROTH. Your line is open.

Good morning. Thanks for taking my questions. First is, the cadence of install kind of your guidance relative to last year that was pacing ahead, I’m just kind of curious as you look at the backlog. Are you seeing any compression in terms of signings to installs year-over-year? And then secondarily, as it pertains to your VR location in LA, any sort of KPIs you need to see internally in order to kind of expand that venture kind of beyond what you already announced? Thanks.

Yes. So on the first one, it’s too early to make any observations about whether the timeframes are being compressed. I mean, our backlog is at record levels. So it’s not surprising that installs are going up. But I don’t think timing is really the issue that’s causing that. And the second thing in terms of VR, we’re basically looking for confirmation of our business model. So not only we will get the revenue model, but how much staff do you have to have. How often you have to change out the content, what the throughput is per hour, what the price point is in different environments. So the LA one, as we’ve said several times, is looking very good in the early days. And we’re – the next one we’re opening is at Kips Bay with AMC in New York City in the next month or two. Then we’re opening in Manchester, which is – so the Kips Bay 1 is in a multiplex. The one in Manchester England is in an entertainment center contiguous to multiplex. So we want to get data points from a variety of places. And if they support the excellent results we’ve seen so far then we’ll decide to go forward. But there is – there are business model things we’re looking for. And over the next several months probably to now and the end of the year, we hope we can improve that out.

And this will be…

Operator, go out to the next question.

This will be our last question from Eric Wold from B. Riley. Your line is open.

Thank you. So question I guess for Greg and/or Rich. Can you talk about the kind of on the TV pilot JVs, talk about the thought process behind those discussions and deciding who to go? It’s obviously on your core cinema business, very short lead times as you want to throw a film into a slot and you’ve got a $1 million, say, $1 million conversion cost at fairly low risk and low lead time. So how do you think about something into next year and the following years the discussions where you’ve got tens of millions of dollars of additional investment. I think it’s $150 million-plus for Inhumans and anchoring yourself to something that has a long lead time and more risk. How do you think about kind of taking a chance on those, especially you would say, a pilot for an unknown franchise?

So first of all, we’re in discussions with at least a half a dozen companies on other projects. So it’s great that we have some opportunities to make informed decisions and the experience that we had probably spoils us a bit on the Marvel on ABC side, because it really has been a great process so far and I don’t want to jinx cinema and knock on the table now. But it has been great. We’re looking at a lot of different options. This is again very early days in this and one size does not fit all. So the lead time is probably, you’re right, because it’s a longer investment with a longer tail. I would say, at least, six months from when we would invest until something could potentially come out, we don’t have to own the same percentage of what we – of what’s going on with Inhumans, it could be a smaller investment. As Patrick said, I seriously doubt that, it would be a bigger one. It also doesn’t have to only be a broadcast partner. Although there is a lot of advantage of the so-called quote analog broadcast structure and why we can really bring something to the party. It would not surprise me within the next year when we have another project that one of them is more for, let’s call it, a streaming service. We will, of course, always make sure that we take care of the windows issue and not put ourselves in a bad position with our partners. That’s something that we’re pretty steadfast on. But at the same time, I could see us going to one of the new digital focused companies on the television side and making sure that as long as the IMAX premiere is first that it’s more along those lines rather than an analog, but we’ll see.

Eric, the only thing I want to add to that is, remember, although in the abstract, this business looks risky, because before we do it, we’ve got a theatrical run and we have upfronts and guarantee carriage for a while, both domestically and hopefully internationally before you release it that we mitigated the risk. So I want to put it in the context agreeing with Greg’s answer. But it’s not like we’re taking these home run shots. We think we’ve got the risk award boxed in an intelligent way.

So with that, I’d like to end the call, and thank you all for joining us. I want to remind everybody that the first quarter is disproportionately not the most important quarter of the year, it’s going on from here. And as I said during my remarks earlier, we believe that the box office each quarter this year will be higher than the commensurate quarter last year because of our strong film slate. And we think, given the network growth done would set up nicely going into 2017 and 2018, and we would like to thank you.

And I would like to go back to our CEO Rich Gelfond for closing remarks.

I just gave the closing remarks, operator.

Operator, if you could just close the call please?