As Multiplexes Slump, IMAX Thinks Big, and Grows Bigger

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Americans aren't going to the movies the way we used to. There were 1.34 billion multiplex tickets sold in this country last year. That's a big number, but attendance has generally been shrinking since peaking at 1.58 billion in 2002. In fact, over the past 15 years there has only been one year -- 2011 -- in which exhibitors drew fewer customers than they did in 2013.

This year is shaping up to be even worse, but one company is making the most of the situation. IMAX (IMAX) has been able to grow its fleet of super-sized projection systems, thanks to theater patrons willing to pay a premium for the experience.

IMAX posted hearty third-quarter results on Thursday. Revenue climbed 18 percent, fueled in part by a 12 percent uptick in the number of theaters around the world with IMAX screens. Adjusted earnings grew ever faster, soaring 83 percent to a better-than-expected showing of 11 cents a share. IMAX has now beaten analyst profit targets in four of the past five quarters.

You're not seeing this kind of growth at traditional multiplex operators. AMC (AMC), Cinemark (CNK), and Regal (RGC) are all expected to post declining quarterly revenue when they report in the next few days.

Bigger Than Life

The secret to IMAX's success is that it's able to offer something consumers can't come close to duplicating at home, no matter how big an HDTV they own, or how good their speakers are. The extra large screens and booming sound systems are far more immersive than the traditional multiplex experience, and this has led exhibitors to team up with IMAX to outfit some of their multiplex screens.

IMAX now has 880 screens in operation worldwide, and orders continue to come in faster than it can fulfill them. It installed 20 new screens during the third quarter, but it received orders for 36 new systems and another half-dozen orders for upgrading existing platforms. The company now has a backlog of 439 screens, up from 356 a year earlier. To be fair, this isn't IMAX dropping the ball. Many orders coming in are for theater installations slated for a couple of years out. It's still an encouraging sign for a platform that seemed to be struggling with a small base of museums and science centers showing documentaries until IMAX hopped on the hot niche of remastering Hollywood releases.

Things got off to a slow start. A few years ago, IMAX was only being offered a movie or so a month. If that one was a dud, IMAX screens had to wait it out. That has all changed now that studios understand the enhanced dynamics of a premium IMAX screening. A whopping 38 movies were remastered for IMAX last year. Now, a studio won't put out a high-profile action flick without making sure that it's going to be simultaneously screened on IMAX.

Nothing but Netflix

IMAX doesn't think like an exhibitor, even though it often enters into joint ventures with leading multiplex chains through which it gets a healthy piece of the box office sales. It marches to its own beat, a point that became even more clear earlier this month when it struck a deal with Netflix (NFLX) to bring "Crouching Tiger, Hidden Dragon: The Green Legend" -- the sequel to Ang Lee's critically acclaimed wire-fu classic -- to more than 800 theaters next summer at the same time as it debuts on Netflix.

The movie won't be presented in traditional movie format: What is likely to be one of next summer's biggest blockbusters will only be available at home on Netflix or on the super-sized IMAX screens. Conventional exhibitors may have balked, figuring that folks wouldn't pay more for a movie ticket than it would cost to get a month of Netflix that would allow the whole family to see it at home. However, IMAX is banking on being enough of a differentiator that it can hold up well even as Netflix implodes the conventional wisdom of release windows.

The future is uncertain for AMC, Cinemark, Regal, and other multiplex operators outside of the screen space that they have set aside for IMAX. The future should continue to be rosier for IMAX. It's already lining up an impressive slate of IMAX-enabled movies next year, including the next "Avengers" and "Star Wars" movies. It's the new feature presentation. It could also be the last hope for exhibitors to stand out in an era of affordable home theaters and high-def streaming.

Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of IMAX and Netflix. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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