Imax (IMAX) shares took another beating late last week after reporting second quarter results. A revenue decline of 28% helped swing the company to a $4.57 million loss. The main contributor to the revenue shortfall was a 32% decline in revenue from new theater installations.
The headline numbers look disappointing, but are shifts in installation options and accounting what's causing the disappointment?
Imax recognized revenue from 4 theater installations in the current year compared to 9 in the prior year. However, they also performed 3 theater installations under joint venture agreements compared to zero in the prior quarter. Under joint venture agreements, Imax generally supplies equipment and installations for free in exchange for a cut of the box office revenue. Imax also performed one more theater installation that had to be classified as an operating lease. Since Imax will be required to perform a digital upgrade at a later date, the majority of the revenue from these types of installations must be deferred until the digital upgrade takes place.
So is the "apples to apples" number for theater installations really 8 compared to 9?
The shift in Imax theater installation options and the changes in accounting will continue to put a damper on reported results. Imax continues to state that 2007 is a "transitional year" for the company. Do analysts and investors know how to make sense of the numbers until the company makes it to the other side?
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There is a lot more wrong at IMAX than simply chalking it up to the use of JV installs.
For example, they reported film revenues of $8.0 million for the second quarter as compared to $11.7 million for the second quarter of 2006. This was despite the fact that they supposedly had 2 blockbuster hits in Spiderman III and 300, which, according to IMAX itself, broke records for attendance.
This merely underscores the nagging feelings of mistrust that IMAX has planted in investors: Botched company sales, misreported numbers, SEC investigations, lawsuits, 0 install quarters, and late filings. They couldn't even schedule their last earnings call without announcing it incorrectly.
The problem with IMAX is a widespread belief in the incompetence and untrustworthiness of management. They continue to report an enormous backlog of deals and yet they have consistently failed to convert this supposed backlog into actual theater installations.
If you look closely, there are also questionable statements in their mega-late 2006 10K including the claim that "The Company recognized revenue on 30 theater systems which qualified as either sales or sales-type leases in each of 2006 and 2005." Yet they had previously reported a total of 16 theatre systems for the combined first three quarters of 2006. This implies they recognized revenue from 14 theaters in Q4 2006 and yet they also reported a net loss of $9,191 for the same quarter in the 10K. Something doesn't click here.
They also claimed that "the Company estimates that approximately 22 of the 74 theater systems arrangements currently in backlog will be recognized in 2007." So far they have recognized 8 (there is no revenue recognition from a JV install). So we should expect 7 installs per quarter for the rest of 2007. Or should we?
IMAX's problems aren't specific to the use of JV installs or any other single issue. The problem is much broader than that. The problem with this company is its management. A change is needed. IMAX has a great product. It's time they had a competent and trustworthy management team to go along with it.
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