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Morningstar | Imax Is Leveraged Toward the Growing Global Box Office for Movies

In the middle of the last decade, Imax reinvented itself by embracing the digital video revolution, allowing the firm to digitally remaster blockbuster films into its proprietary large-screen format. Imax is now the dominant player within the premium large-format cinema marketplace and, in our view, has carved out a narrow economic moat.Imax has leveraged its format standards and technologies, including its projection systems and digital film conversion process, to capture over 50% market share within the premium large-format cinema marketplace. This switch from films shot only with Imax cameras helped the firm expand from 210 theaters in 2008 to over 1,500 in 80 countries today, increasing the annual Imax releases from 13 in 2007 to 60 in 2017 to 70 in 2018.Imax is now primarily a technology hardware and brand-licensing company that does not operate the vast majority of Imax theaters. Instead, the firm generates revenue via by selling and leasing the required proprietary equipment and via fees for digitally remastering standard films into the proprietary Imax format. While expensive, Imax screens boast average annual gross revenue of around $800 million, well above the per-screen average of traditional screens.A higher percentage of new theaters for the company now fall under a joint revenue-sharing arrangement, under which Imax receives a larger percentage of box-office receipts (typically 19%-20%) versus a traditional sales-lease agreement. We believe that most of these agreements (generally 10-year terms with three- to five-year renewal options held by theater owners) will be renewed, but the first real test of this thesis will not occur until 2021.Imax estimates that 2,855 zones worldwide could support one Imax theater, with the U.S. at roughly 75% penetration. The near-term expansion opportunity for Imax will be in China, which is already the firm’s largest market, with 631 screens and 276 screens in backlog, versus 400 and under 50, respectively, in the U.S. Beyond China, we expect India, Europe, and Latin America to be the next big markets for Imax as it increases the number of local-language movie DMR conversions.