Imax Wins Powerful Friends

The movie company's stock has enjoyed a nice run as big studios start to embrace its technology.
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Imax's

(IMAX) - Get Report

focus on making its business friendly to Hollywood is starting to pay off.

The entertainment tech company, which makes the gear that turns a standard movie into a large-format, three-dimensional film extravaganza, has slashed the cost of converting a traditional movie house to an Imax. As a result, more theaters have come on board -- and the big studios, in turn, have taken notice.

"Two years ago, we had to convince studios to release in Imax," says co-CEO Richard Gelfond, who has seen his company's stock double over the last year to a recent $8.25. "Now they're trying to convince us to release their films."

The turnabout has bolstered the company's numbers as well. Profits rose sharply on a 14% year-over-year revenue gain. Now, as it contemplates which of the coming blockbuster releases it will tie itself to, Imax is quietly exploring new digital avenues -- and a possible return to original programming when the timing fits.

With approximately 250 Imax screens across the globe and third-party licensees expanding the company's footprint from Argentina to South Korea, it's undeniable that the Imax experience is expanding in a number of directions.

There was a time when that was not the case. The company was built on large-scale nature and science documentary productions that were visually captivating but expensive to produce and screen. The results failed to captivate Hollywood, as the studios couldn't see the advantage of releasing their blockbuster films in the company's format. Ironically, Imax lacked scale.

This year, though, the company is pegging the number of new theater signings at 40 to 45. Imax expects 35 new Imax-licensed theaters to be installed by year's end. That growth, coupled with the increasing likelihood of a more permanent joint venture with a studio, is a key marker for investors who not long ago had doubted the company's prospects. The stock dipped to an all-time low of 55 cents in the fall of 2001.

But the stock price hasn't been the only place where Imax has turned things around. It used to cost a theater owner $5 million to make the Imax leap. Now it costs $1.5 million. That's a big advantage in a business where year-to-year ticket sales have been flat.

Gelfond says the costs can be recouped in three years using demonstrable assumptions. He pegs the number of titles a year Imax needs to release to make a theater owner's investment pay off at six.

Largely because it has made things easier on the exhibitors, Imax is now poised to make itself indispensable to studios that view the Imax experience as a complimentary aspect to their action-oriented releases. The success of recent Imax/studio partnerships -- such as Warner Brothers'

Polar Express

, which grossed $50 million in Imax theaters -- is an indicator of where things are likely to go from here.

While 20th Century Fox's

Robots

, which has been in theaters for a month, has done more modestly in Imax format, the company has lined up Warner Brothers' releases of

Batman Begins

and

Charlie and the Chocolate Factory

for early to midsummer. Warner announced Monday that the next installment of Harry Potter, the popular J.K. Rowling series,

Harry Potter and the Goblet of Fire

, will be released in Imax concurrently with its regular theatrical release in November.

There is also growing speculation that audiences will enjoy

Superman Returns

, another Warner Brothers release, through the Imax experience when it is released in 2006. Gelfond would not comment on any arrangement, but said the company was talking to a number of studios about next-year releases.

The co-CEO was more candid on long-term issues. When asked about the possibility of upping its original programming output, Gelfond said that "in three to four years" it will be time to look at an increased return to more original projects. He likened the company's approach to that of Home Box Office, which started by buying feature film rights for cable TV and then started making original programming when the network was big enough to profit from it.

Meanwhile, studio marketing support for Imax is evolving. In the past, says Gelfond, "they took a go-slow approach and weren't sure if Imax would cannibalize or be of incremental benefit

to a release. They've figured out that it's actually additive to box-office results." Imax is now being included in junkets, press TV ads and in newspaper ads.

Imax is also exploring technology that would allow it to digitally broadcast sporting events in Imax theaters. Though in its nascent stages, the company is in the early talks with companies on how to meet the technological needs of broadcasting live action in 3D. Super Bowl XLV in 3D, anyone?

There are factors out of the company's control that investors might want to take note of before getting too giddy. Theatre owners like

Regal Entertainment

(RGC)

or privately held

Loews Cineplex

could invest in digital upgrades on their screens instead of investing in Imax. If that happens, the company could struggle to meet growth projections down the line.

A second issue that is largely out of Imax's control is the general volatility of Hollywood. In other words, unless the company brokers a solid long-term joint venture with a studio, Imax is likely to rise and fall with the tide of sentiment about its technologies (like 3D) and the precariousness of each new release.

But for the moment, it seems like Hollywood has no intention of holding back on the company or its technology.