|Company Name:||Imax Corporation|
|Event Title:||Goldman Sachs 22nd Annual Communacopia Conference Transcript|
|Event Time:||10:30 AM ET|
Our next session, I am pleased to welcome Rich Gelfond, Chief Executive Officer of Imax Corp. Rich has been CEO of Imax since May '96, he has been on the Board since '94. So, thank you very much for being here today Rich. Maybe you can start by talking a little bit about how IMAX has progressed. It's a fascinating story to me, the company has been around for I believe 45 years, but the business model is really changed pretty considerably over the past five or so.
Chief Executive Officer
What's actually changed considerably probably over 10, it seems quicker than maybe it was, but the first part I will go very quickly is that IMAX used to be in standalone museums and science centers and a couple of high profile theaters and IMAX made movies, films with its own cameras, the -- is bears, whales, and seals kinds of movies. And then about a decade ago, we have figured out how to take a lot of cost out of both the film making side and the theatre side.
So instead of having to go in a standalone building that fit into a multiplex, which obviously shared cost and shared personnel and labor lowered a lot of cost. On the film making side instead of having to use our cameras and on having to make your own films with our own directors, we figured out a process whereby we can take Hollywood films and convert them through a proprietary process we had called DMR into IMAX film.
So what that means is when you go to an IMAX theater now and you see Gravity, which is opening next week, instead of being film with IMAX cameras necessarily, we've algorithms that blow the movie up. So, if you took a regular movie and you put it in an IMAX projector, it would look really lousy, because there wouldn't be enough data and you blew it up. So IMAX is a hardware and software solution. So we don't just have a special projection, but it's literally a different movie, that's been manipulated to make the quality sufficient to be seen on a big screen and in the way we show it. So that was sort of the, going back 10 years. Then in the last five years or so, there have been two dramatic changes.
One was we converted from film to digital. So an IMAX film frame is about this big to make one spool, so think of one show showing at Lincoln Square in New York, that film platter costs $40,000 a piece. So when Disney or Warner Brothers was releasing one movie, every one of those movies, every one of those prints cost $40,000.
And if we open the day and date film across the world that was an awful lot of money and you had to play the film for a very long time to recruit that costs, by going digital that same former spool now costs about $100 or $150. So it essentially wiped the way a huge cost of doing business in IMAX and a lot of things happened around that. One, instead of doing six movies a year because that's all you could afford, we now do about 30 movies a year. If a film doesn't work, you could change it out. You didn't need to projectionist anymore, the same kind of young person, who is pressing the buttons on the other ones to do that. So that dramatically changed our business.
And then the second dramatic change to our business is in certain territories, we went to a joint revenue share model away from a sales model. So again pre 2008 if you were an exhibitor and you wanted to go into the IMAX business, you had to give us $1.2 million upfront, you paid us a minimum fee and you paid us a royalty, but it was high upfront cost. Now if you want to go into the IMAX business, with the exception of a number of territories, you basically don't pay us anything. You give us the box and we get roughly 20% of the gross box office on a quarterly basis paid in. So, one other I should just leave it is the business model, which logically flows from there.
So we have two revenue streams. One is this 20% we get from the exhibitors or in certain countries it's the 1.2 million, which is a 50% gross margin and the second is from the studios we get 12.5% of the box office. So again just because it's on my mind it's opening next week, when Gravity opens with Warner Brothers we get 12.5% of the box office from Warner Brothers on whatever the film does in an IMAX theater and we also get roughly 20% of our joint venture theaters and then a one-time margin and a small royalty from the theaters that were opened. We're summarizing that we get roughly a third of the box office.
Now obviously we have capital cost in putting up the equipment and marketing cost and things like that, but it's a different business than either the movie making business or the exhibition business.
Yeah. And maybe kind of extending from your comment about the business model. Can you talk a little bit about the margins of the business sort of the cost base seems relatively fixed, so how do you think about kind of the margins as going forward?
Chief Executive Officer
Well, as you do more box office since the cost structure is relatively fixed, but I think this year we gave guidance of 5% to 8% growth in our SG&A and as your network grows and you add theaters obviously your revenues grow and they should be highly leveraged revenues . Now there are some noise in there at times and like this year some of the noise has been we are spending a fair amount on R&D , because we are upgrading from our existing digital system to a laser based system.
Now what that means is for large screens like the one at Lincoln Square our existing technology doesn't allow you to light that whole screen, laser technology enables you to do that. And it will enable us to go bigger and bigger in IMAX theaters and over time provide better and better experiences for the audience. Because we haven't yet replaced those bigger theaters from film to digital or some of them, some of the noise right now is also you're still paying some of those film prints, probably about 40 of them something like that. So that hasn't been wiped away yet. So, it's extremely leverageable, but subject to some of the noise in the short run.