IMAX Earnings – Behind The Headlines
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Quarterly earnings season is a great time to do a checkup on stocks that you own. You not only get a glimpse into what happened over the last three months, but you also get an idea of what management expects going forward. With that in mind, let's find out about a company I own, IMAX (NYSE: IMAX).
The headline numbers for IMAX were revenue growth of 23.11%, and adjusted EPS growth of 50%. While these numbers look very good, there are a few other numbers that caught my eye as well. First is gross margin, this is critically important because gross margin growth usually will translate to better EPS growth going forward. IMAX gross margin grew by 30% year-over-year in the current quarter. The second figure is adjusted net income growth. While EPS is rounded off and shows 50% growth, adjusted net income was actually up about 58%. This shows not only is IMAX improving its efficiency, but net income growth is actually being slightly under reported because of the EPS figures being rounded off to the nearest cent.
IMAX operates three main segments: equipment sales, services, and rentals. Equipment sales saw a decrease of almost 29%. This was due to lower sales of systems and an increase in joint marketing agreements. Services revenue, which encompasses these joint marketing agreements, jumped 48%. Rental sales increased 147%. While sales of equipment declined, this is actually a good thing as I'll explain later.
When it comes to IMAX's cash flow, the statement isn't quite an apples to oranges comparison without one major adjustment. On the surface, it looks like the company's cash flow jumped from a negative $9.56 million to a positive $10.411 million. However, last year, the company had a negative adjustment of nearly $14.5 million, most of which was stock based compensation. Without this adjustment, last year's operating cash flow would have been about $500,000. So while the jump into positive cash flow territory is a huge development, it's not quite as huge of a turnaround as it first seems.
What can we expect from IMAX going forward? The first positive development is, the lineup of feature films for 2012 and 2013 are better than 2011. For instance, destination type films for 2012 are: Titanic 3D, The Avengers, Men in Black III, The Amazing Spider-Man, The Dark Knight Rises, and The Hobbit. All of these films are expected to be big releases where audiences get an improved experience going to an IMAX theater. The fact that IMAX has been able to pre-release films in the past as much as 5 days early also gives the company an edge. The Avengers and Men in Black III are both slated for May which should give a lift to the second quarter. With The Amazing Spider-Man and The Dark Knight Rises expected in July, the third quarter should be good. If investors have anything to worry about, it will be when The Hobbit is released in December. If the film is released late in the month, some of the revenue and income may flow over to the first quarter of 2013 rather than the fourth quarter 2012.
IMAX is expected to continue its growth trajectory in 2012 when it comes to locations as well. The company has 643 theaters versus 528 last year, a jump of 21.78%. With about 85 new theaters expected for the balance of 2012, this indicates an increase of 13.22% over the remainder of the year. While 44.7% of the company's revenue is generated outside of the U.S. currently, IMAX expects to continue rapidly expanding its international presence. In fact, 70% of new signings and nearly 87% of the company's backlog were for international markets. The company's fastest growing market, China, is expected to account for about 200 of the company's total theaters in the next 5 years, up from 91 today. As IMAX expands, the company also expects to focus on Latin America and India, as both high growth and under penetrated markets.
Lastly, there are two important trends that should drive IMAX income growth going forward. First, the company is moving from less sales of its total systems and more to joint revenue sharing arrangements. The best way I can explain this is, think about when a restaurant begins to franchise its locations instead of keeping them company owned. As the franchisees grow, revenue doesn't move as fast, but income usually picks up. This is what is happening with IMAX. More of the company's theaters are being built under joint revenue sharing agreements. Since joint revenue sharing arrangements are ultimately more profitable for IMAX, this is why investors shouldn't be concerned that equipment sales have dropped. Second, as the company's theater system grows so does the maintenance income to IMAX. Looking at the last quarter, system maintenance grew by 18.2%. Currently this represents a small amount of total revenue, but as the theater network grows, so will this category of income. Since this is less dependent on film releases, this should give IMAX a more consistent earnings profile.
When it comes to IMAX competition, RealD (NYSE: RLD) is the company I hear mentioned the most often. While RealD relies more on 3D technologies, and IMAX is more about higher quality video and audio, blockbuster movies benefit both companies. At this point, there are two reasons that I prefer IMAX over RealD as an investment. First, IMAX has the higher expected future growth rate (28% vs 18%). Second, IMAX is producing free cash flow, something that RealD hasn't done for a full year since 2009. Long story short, IMAX benefits when Hollywood produces blockbuster films. 2012 looks like a good year for films, and 2013 could be even better.
MHenage owns shares of Imax. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Imax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
