Why Is Imax (IMAX) Down 5.3% Since Last Earnings Report?

It has been about a month since the last earnings report for Imax (IMAX). Shares have lost about 5.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Imax due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

IMAX's Q2 Earnings Surpass Estimates, Revenues Rise Y/Y

IMAX reported second-quarter 2019 adjusted earnings of 32 cents per share that beat the Zacks Consensus Estimate by 4 cents and increased 6.7% year over year.

Total revenues of $104.8 million beat the Zacks Consensus Estimate of $98 million and increased 6.6% from the year-ago quarter.

The year-over-year revenue growth was driven by an upside in the theater and network business segments.

Category-wise, equipment and product sales were $19.7 million, up 28.1% from the year-ago quarter. Additionally, services and rentals revenues were up 3.4% and 2.9% year over year to $56.7 million and $25.9 million, respectively.

Finance income decreased 16% year over year to $2.6 million.

Segment Details

IMAX network business revenues were $64.7 million, up 6.3% year over year.

Within the segment, IMAX DMR revenues were up 8.7% to $39.3 million.

Gross box office from IMAX DMR films increased 6.5% year over year to $364.9 million in the reported quarter. The increase was primarily due to robust China box office.

Notably, Greater China box office increased 28.8% year over year to $130.1 million. Greater China is currently IMAX’s second-largest market measured by revenues and accounted for roughly 35.7% of total revenues in the reported quarter.

IMAX’s largest single international partnership is in China with Wanda Film. Wanda’s total commitment is for 359 theater systems in Greater China (of which 344 theater systems are under the parties’ joint revenue sharing arrangement).

Moreover, IMAX released 19 films (15 new and 4 carryovers) compared with 14 films (10 new and 4 carryovers) in the year-ago quarter.

Joint revenue sharing arrangements-contingent rent was $25.3 million, up 2.3% year over year.

IMAX theater business generated revenues of $34.94 million, up 13.2% year over year, driven by one additional installment of system upgrades and three additional systems recognized as hybrid joint revenue sharing lease arrangements.

Within this segment, IMAX systems revenues increased 8.8% from the year-ago quarter to $16.6 million. Theater system maintenance revenues were $13.2 million, up 7.1%. Moreover, other theater revenues increased 14.4% to $2.58 million in the reported quarter.

New business revenues plunged 84.7% year over year to $0.5 million. However, other revenues increased 34.3% from the year-ago quarter to $4.65 million.

Network Growth Statistics

As of Jun 30, 2019, 70.7% of IMAX theater systems in operation were located within international markets (all countries other than the United States and Canada), up from 67.9% as on Jun 30, 2018.

There were 1,541 IMAX theater systems (1,445 commercial multiplexes, 15 commercial destinations, 81 institutional) operating in 81 countries as on Jun 30, 2019.

In second quarter 2019, IMAX installed 27 new IMAX theater systems and upgraded eight systems. New installs consisted of 9 sales-type, 13 JVs and 5 hybrids. Notably, total signings were 73 in second quarter, of which 45 were for IMAX laser.

There were 612 theaters in backlog as of Jun 31, 2019 compared with 635 in the corresponding period of 2018.

In the year-to-date period, the company signed deals across regions – Europe, North America and Japan.

The company’s large deals include CGV deal in China for 40 theaters and with Cineworld (Regal) for 15 U.S. theaters.

Operating Details

Gross margin contracted 460 basis points (bps) on a year-over-year basis to 56.8% in the reported quarter.

Network business gross margin contracted 370 bps on a year-over-year basis to 66.8%. The decreased gross margin ratio was primarily attributed to the increase in contractual marketing obligations related to IMAX DMR films that delivered particularly strong box office during the quarter.

Theater gross margin was 44.2% in second-quarter 2019, down from 51.9% in the year-ago period due to the mix of systems installed in the quarter and higher sustained engineering costs required to support the IMAX with Laser roll out.

Adjusted EBITDA was $41.4 million in the reported quarter compared with $39.5 million in the year-ago period. Adjusted EBITDA margin expanded 100 basis points to 44%.

Selling, general & administrative (SG&A) expenses declined 1.1% year over year to $32.1 million. Research & development (R&D) expenses decreased 68.8% on a year-over-year basis to $1.22 million.

Operating income margin expanded 790 bps on a year over year to 22.9% in the reported quarter.

Balance Sheet & Cash Flow

As of Jun 30, 2019, IMAX had cash and cash equivalents of $106.5 million compared with $123.1 million in the prior quarter.

Cash flow from operating activities was $49.2 million. Free cash flow was $34.1 million at the end of the quarter.

2019 Guidance

Box office is expected to grow in low double digits compared with the earlier guidance of mid-to-high single-digit range. IMAX is anticipated to install 185-190 theater systems. The company expects to upgrade 45 screens to IMAX laser and is anticipated to install approximately 140-145 new systems.

Additionally, adjusted EBITDA margins are anticipated to increase in the range of 41% to 42% compared with the 2018 reported figure of 39.6%.

The company anticipates its box-office performance to be strong in 2019, owing to popular releases like Avengers: Endgame, Spider Man: Far From Home and Lion King.

IMAX stated that films including Bond 25 will use IMAX cameras in 2020. Notably, Comcast’s Universal Pictures is one of the producers of the film.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -25% due to these changes.

VGM Scores

Currently, Imax has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Imax has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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