PowerPoint presentation accompanying my short pitch of IMAX Corp. (NYSE: IMAX) for the 2012 University Wide Stock Competition hosted by the McIntire Investment Institute and Alternative Investment
PowerPoint presentation accompanying my short pitch of IMAX Corp. (NYSE: IMAX) for the 2012 University Wide Stock Competition hosted by the McIntire Investment Institute and Alternative Investment Fund
IMAX’s cheap attempt at differentiation deceives consumers and impedes its relationship with film producers
IMAX is attempting to work directly with movie studios and independent film producers to selectively use IMAX cameras and technology in their production. However, because of the complexities with the larger 15/70 IMAX film format, IMAX filming requires a 240 lb. camera with special supports and rigging to move it around. This same camera is also as loud as a chainsaw, meaning that all of the audio work has to be done post-production. Furthermore, the cameras can hold only a three-minute spool, which takes 20 minutes to reload. Finally, because of the precise detail of IMAX, these cameras exaggerate even minor imperfections in the images captured. All of these factors dramatically escalate the cost of producing an IMAX film to $3-8 M in 2-D or $8-15 M in 3-D.
IMAX Digital films typically cost movie-goers the same as true IMAX films but employ a less expensive projection system and film that is subpar compared to the authentic “IMAX experience.” Movie buffs unaffectionately refer to this format, which also creates a distracting screen door effect, as “lieMAX.” Neither IMAX nor theaters distinguish between these cheaply retrofitted Digital IMAX theaters and actual IMAX theaters, yet they are deceptively marketed as identical technologies despite yielding a vastly different experience. In fact, some IMAX theaters are actually being converted to the IMAX Digital format in order to cut costs, unbeknownst to moviegoers. Altogether, 342 of the 430 IMAX theaters in the U.S. are Digital, and the majority of the remaining 88 screens that use real 70mm IMAX are attached to museums and often do not show Hollywood movie releases. By failing to utilize true IMAX film properties in its theaters, IMAX is willfully alienating directors by essentially wasting costly IMAX production when these films will ultimately be viewed only with low resolution and smaller size Digital IMAX.
34% (historical average) of IMAX total revenue for Q1 2009 – Q3 2012 has been attributable to IMAX Systems
39% (historical average) of IMAX total gross margins for Q1 2009 – Q3 2012 has been attributable to IMAX SystemsAround 50% COGS as % of total revenue for 2009-11, remainder being gross profit.Increase in R&D from 2.2% to 3.3% of total revenue from 2009 to 2011.SG&A stable at 32-3% of total revenue over 2009-11.
IMAX Institutional Shareholder Base Is Largely Composed of Growth Funds: IMAX shares are primarily held by growth funds like Frontier Capital Management, Alydar Partners, and HHR Asset Management. Once these investors begin to perceive slowing growth in IMAX’s revenue…
Most IMAX films are merely digitally re-mastered (DMR) counterparts of regular 35mm frame, 1.9:1 aspect ratio films that have been stretched and enhanced with improved visual and audio features, not true IMAX films produced using IMAX cameras.
“In a typical IMAX DMR film arrangement, the Company will receive a percentage of net box-office receipts of the film, which generally range from 10-15%, from a film studio for conversion of the film to the IMAX DMR format and for access to the IMAX distribution platform.”
think big , sell short ® Presented by Ryan Rechkemmer 15 November 2012
Repeating Cinerama’s Mistakes Cinerama IMAXChange of Ownership Acquired by Pacific Coast Bought by WGIM Acquisition Theatre Company in 1963 Corp. in 1994 prior to IPOTechnological Downgrade Discarded R&D, switched to Introduced a shrink-to-fit digital standard 70mm film stock, and version for smaller, retrofitted decreased screen curvature, which theaters and converted existing ruined picture fidelity theaters to the new formatMarketing Strategy Still called it Cinerama Still call it “The IMAX Experience,” charge same priceCustomer Reaction Customers were upset Customers are upsetEnd Result Relegated to a releasing Brand diluted, lost competitive company for conventional films advantage, ascent of rival theater by late 1960’s, now defunct formats, ultimate fate to be seen
Downside Catalysts Internal External Investor-based• Depletion of • Increasing • Investor IMAX System competition wariness of installation from movie aggressive backlog theaters’ own accounting• No further rival formats practices gains from • Exhibitors • Growth funds optimization regain reduce of movie bargaining exposure to release power IMAX schedule
Competition From Customers AMC Enhanced Theatre Experience (ETX) Regal Premium Experience (RPX) • 20% larger screen • 60-foot screen • 3D capabilities • Dual 30K lumen digital projectors • digital projection • 100 kW sound system • 12-channel, 50 kW sound system • Improved seats with headrests • 15 operating locations at present • 28 operating locations (August 2012) Cinemark Extreme Digital (XD) Carmike BIGD • Wall-to-wall oversize screen • 78’ by 35’ screen • 2D and RealD 3D digital projection • 2D and 3D 30K lumen DLP projection • Custom JBL digital surround sound • 7.1 surround sound • New plush seating • Plush leather high-back rocking seats • 63 operating locations at present • 14 operating locations at present
Aggressive Accounting• IMAX lost multiple shareholder class action lawsuits in 2006 due to improper revenue recognition of theater installations• IMAX amended its JRSAs in 2010 to extend the life of IMAX systems by 3 years, which delays substantial depreciation expenses• IMAX has changed its definition for forward-looking installation estimates to now include prospective new signings
ConclusionLack of Differentiation Brand Dilution No Competitive AdvantageUnsustainable Growth Alienation of Customers Aggressive Accounting Backlog Depletion Increasing Competition Investor Wariness 50%+ Downside Potential
Appendix• Real/Fake IMAX Map• A Case Study in Virginia Beach• IMAX Movies and Stock Price• JRSA and Film, Rev. and G.M. per Theater• Rise of Substitutes to Movie Theaters• IMAX’s Box Office Rev. Sliding Window• Sequential Distribution of Films• Risks to Short Selling IMAX• IMAX Income Statement• IMAX Balance Sheet• IMAX Cash Flow Statement
A Case Study in Virginia Beach IMAX at the Virginia Aquarium & Marine Science Center Type: 60’x80’ GT projection Shows: Primarily documentaries Price: $9 (adult), $8 (children) IMAX at AMC Lynnhaven 18 Type: IMAX Digital system, also known as “LieMAX” Shows: Wide releasesPrice: $15 (adult), $12 (children)
IMAX Movies and Stock Price28 minutes of IMAX IMAX DMR, IMAX DMR, then IMAX Digital only, camera footage limited engagement IMAX 3D DMR direct to video 3D IMAX DMR limited engagement
Joint Revenue Sharing Arrangement (JRSA) and FilmRevenues and Gross Margins per Theater (Q1 2009 – Q3 2012)
Rise of Substitutes to Movie Theaters Consumers are shifting towards in-home movie streaming with:
Theaters’ and IMAX’s Proportion of BoxOffice Revenue Each Week Since Release5% 4.25% 3.86%4% 3.62% 3.26%3% 2.64% 2.20%2% 1.79% 1.46% 1.19% 1.07%1%0% 1 2 3 4 5 6 7 8 9 10 Number of Weeks since Release
RisksA runaway IMAX blockbuster on par withAvatar in 2009 could catapult IMAX’srevenue, earnings, and stock price.The predicted 2013 release of a laserIMAX projector might allay concernsabout its Digital projection system.IMAX could generate incremental growthby expanding abroad, especially inuntapped emerging markets.