The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Q2 miss primarily from lower-than-expected gross margin. Revenue was $82 million, vs. our estimate of $78 million and consensus of $76 million. Adjusted EPS was $0.22, vs. our estimate of $0.24 and consensus of $0.26. We believe GM was negatively impacted by higher-than-expected JV installs, film print costs for a large release slate, and 3D conversion costs for a number of titles.
After the market close yesterday, IMAX (NYSE:IMAX) announced the expansion of its partnership with Wanda Cinema Line and subsidiary AMC Theatres. We believe today’s increase in IMAX’s share price has been driven primarily by the Wanda / AMC news as it could indicate that the size and pace of network installations will increase over time to higher levels than had been previously anticipated. In reality, however, the new theaters will likely end up as another anonymous part of IMAX’s significant backlog, which has not been below 200 theaters in roughly three years due to lower-than-expected total installations.
High level installs guidance reflects the limited power IMAX has over the process, and increases the difficulty of predicting the pace. Before Thursday, guidance was limited to 110 – 125 theaters, with two-thirds expected to be JVs and the pace weighted towards 2H. It now appears that the installation schedule is weighted to Q4. We are lowering our expectations for Q3 and increasing them for Q4. We would not be surprised if actual Q4 installs lag expectations due the inability of third-parties to prepare sites on time.
A continuing disconnect between the backlog and installation guidance. Despite a backlog of 284 theaters, FY:13 installation guidance is for only 110 – 125 theaters, implying that IMAX would have to install roughly 100 theaters every year for almost three years just to catch up with its backlog, excluding any new signings.
Strong DMR box office in Q2 suggests IMAX is getting better at optimizing its release slate. Its move away from animated films to a more fanboy-friendly slate appears to be working, with Q2 DMR box office of roughly $220 million up 71 percent qo-q and 26 percent y-o-y, greater than total commercial multiplex growth of 20 percent y-o-y.
Maintaining our NEUTRAL rating and our 12-month price target of $28. Our price target reflects roughly 22x our FY:14 EPS estimate of $1.25. Despite a disappointing 1H, the stock appears primed to benefit from a strong release slate towards year-end, as well as heavily back-end loaded installs and results.
Michael Pachter is an analyst at Wedbush Securities.