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Imax Looks to Cast a Spell

Imax (IMAX) is hoping Harry Potter can work his magic on the movie company's stock.

Harry Potter and the Goblet of Fire hit theaters last weekend with a bang. The movie, made by Time Warner's (TWX) Warner Bros. studio, delivered strong gains for Imax at a good time, right in the middle of a big fourth quarter for the company.

Imax, which is based in New York and Toronto and makes money mostly from theater licensing, has suffered a couple of tough quarters after missing earnings estimates. Its stock is off 12% in three months. But with the opening numbers for Harry Potter and the Goblet of Fire beating the last Imax-converted endeavor, Charlie and the Chocolate Factory, by 33% on roughly the same number of screens, Imax's Richard Gelfond is optimistic.

"These numbers are definitely better than expected," says Gelfond, who is co-chairman along with Brad Wechsler. This weekend, Tom Hanks' Polar Express will be re-released on Imax screens to coincide with an expanded DVD release of the film. Warner Bros. has been promoting the Christmas flick heavily while touting the Imax experience. Gelfond says pre-sales in London and at an Imax owned and operated theater in Sacramento have been "very encouraging."

Still, questions persist, thanks to box-office volatility and to worries that exhibitors may choose digital upgrades instead of Imax.

Earlier this month Piper Jaffray's Anthony Gikas lowered his target price to $9 from $10, citing reduced installation guidance and the risk associated with big December expectations. "Installations in the period were 7 vs. our 11 estimate," wrote Gikas, who rates the stock market perform. "Fewer installs were offset in part by better-than-expected films revenue in the period." The firm does business with Imax.

Others see progress but caution that the going will be slow.

"The story for Imax used to be about getting more and more installations and taking the associated fee," says analyst Eric Wold at Merriman Curhan Ford, who owns the stock. "They now have a revenue-sharing model that is much more advantageous."

That said, Wold doesn't expect to see the results of that shift this year. He notes, for instance, that Imax eats the cost of converting Hollywood films from 35 millimeter to Imax. But as it grows the number of theaters around the world, the company should pull more box office, especially if it continues to release six Hollywood pictures per year.

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Up and down with Imax

There are more than 260 Imax-affiliated theaters across 36 countries. Harry Potter will be seen on a total of 90 Imax screens, while Polar Express will hit 83. By company estimates, Imax-affiliated screens could grow to 300 screens in North America and 600 internationally within the next several years. By end of 2005 the company says it will have 35 Imax-licensed theaters installed this year and 40 to 45 signings.

Gelfond says the company, which gets about 4% of the box office from its licensed theaters and between 10% and 15% of studio receipts from a blockbuster film on Imax screens, has seen the level of theater signings double this year. "We've made an awful lot of progress," he says. Theater owners, for whom it once cost $5 million to install Imax systems, now pay $1.5 million, which means they can recoup their investment in three years, Imax says.

One risk Wold mentions is that exhibitors might not see the benefit of spending the money to outfit theaters. But he notes that the Imax releases of Hollywood blockbusters tend to outperform 35-millimeter screenings, which suggests many pocketbooks should open.

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