Good day, and welcome to the IMAX second half full-year conference call for IMAX China. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question and answer session, at which time you will be requested to press star one to ask a question. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Jessica Kourakos, Senior Vice President of Global Investor Relations. Please go ahead, Ms. Kourakos.
Good morning, everyone, and thank you for joining us on IMAX China's full year 2016 earnings conference call. Joining me today is our Chairman, Rich Gelfond, CEO Jiande Chen, and Jim Athanasopoulos, our CFO and COO, who will have prepared remarks. Also joining us today is Greg Foster, IMAX China board member and head of IMAX Entertainment, who will be available for Q&A. For the purpose of this call, all financial figures will be provided in US dollars unless stated otherwise. Furthermore, the financials we provide you today will follow IFRS accounting standards, which may differ in some respects to U.S. GAAP. I would also like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking and that they pertain to future results or outcomes.
Actual future results or occurrences may differ materially from these forward-looking statements. The full text of our full year 2016 earnings release, along with supporting financial statements, are available on our website, imax.cn. Today's conference call is also being webcast in its entirety on our website. With that, let me now turn the call over to Rich Gelfond.
Thanks, Jess, and thank you all for joining us today. Our growth in China has been quite extraordinary. It was just five years ago that we established IMAX China as a wholly-owned entity. At the time, we had about 70 screens and believed the ultimate opportunity in China was roughly 400 screens. Sitting here today with a network of 400-plus screens open and another 300-plus in backlog is pretty amazing. Our growth, both in pace and scale, has far exceeded any expectations I had set five years ago. Despite this, we still see a big runway ahead for growth in the market. Our momentum in China, specifically on the signings and install front, showed no signs of slowing in 2016.
I'd like to start by highlighting some of the many accomplishments we achieved before going into some of the exciting things on the table for this year and beyond. Looking first at the network, we achieved a record 238 theater signings in 2016, which is more than we signed in the previous two years combined. This activity also underscores the significant demand we continue to see for IMAX theaters in China as exhibitors anticipate the promising film slate ahead. I would also like to point out that the large majority of these signings were existing partners, including Wanda, Jinyi, Shanghai Film, and Lumière, reinforcing their confidence in our business and the importance they place on IMAX as a premium differentiated offering within the multiplexes. This robust signings activity has led to record-breaking backlog. This backlog provides us with significant visibility towards future installs and revenues.
I'd also like to point out that the mix of our backlogs, in terms of tiering of cities, is relatively in line with our existing network, so there shouldn't be a meaningful shift in our penetration across tiers over the next several years. In that regard, 2016 also marked a record number of installations. As a result of these installations, we grew the network by over 40%, adding 117 new theaters, which resulted in a year-end network of 407 commercial theaters. This is more than double the number of installs we had averaged over the previous four years. In fact, our network in China is now larger than any other market in the world. We believe that a key driver of our heightened level of installation activity is exhibitors gearing up for what is looking like a very promising 24 months in 2017 and 2018 of blockbuster-level content.
Content, which in many cases is part of established franchises in China, such as The Fate of the Furious, part of the Fast & Furious franchise, and Transformers. The long-term significance of our heightened signings and install activity is also what drives revenue and earnings growth, particularly when you consider what a larger network can mean for earnings during stronger box office years. Moving on to box office, we delivered full-year box office of $296 million in 2016. On a constant currency basis, we grew box office slightly versus 2015. Per-screen averages for the year declined to $932,000, with the second half seeing the biggest headwind. We believe that this decline was primarily the result of weaker content in 2016 and a roughly 7% decline in the renminbi versus the dollar.
Second, as we've said before, because of elastic ticket pricing in China, a weaker slate tends to lead to weaker ticket prices, given lower demand from consumers, which exacerbated the issue in 2016. Also, as we've said before, there is a ramp-up period of roughly 24 months for a new theater to reach its full potential. When you have a year like 2016 with 117 new installs, that seasoning effect is more pronounced. Overall, we take a portfolio approach to our film business. Generally, we believe our portfolio of films should generate fairly consistent returns, given you'll have surprises on both sides. However, the impact should more or less net out over a 30-plus film portfolio.
While 2015 and 2016 saw some highs and lows, we think 2017's promising slate kicked off successfully with Journey to the West and Xander Cage's xXx. Should allow us to once again see increased attendance, ticket prices, and PSAs that grow nicely off of last year's levels. Jiande, who is the CEO of IMAX China, why don't you go through some of the things going on in 2017 with respect to content?
Sure. Thank you. As Rich Gelfond mentioned, 2017 is shaping up to be a potential blockbuster year in terms of content, with a number of very well-established film franchises in China returning to the big screen. We just concluded playing Journey to the West 2, which generated nearly RMB 18 million in IMAX and accounted for 8% of countrywide box office on just 1% of the screens. Despite disappointing overall box office result in 2016, our indexing over the past several films continues to be quite strong. We did 15% of the box office of Doctor Strange, 14% of Fantastic Beasts, 11% of Great Wall, 13% of Rogue One, and 8% on Journey to the West 2. We are seeing similar results on xXx, which has done over RMB 11 million in IMAX box office. These performances are encouraging given the promising 2017 film slate.
On that note, I would like to highlight some of the titles we hope to see in China this year, with the caveat that not all of these titles have yet been approved for release in China. Next month, we will kick off with Beauty and the Beast, followed by Kong: Skull Island. In April, we will have The Fate of the Furious, which is the sequel to Furious 7. As a reminder, Furious 7 did about RMB 390 million in China and was our highest-performing film of all time in China. In May, we should see Guardians of the Galaxy Vol. 2, as well as Transformers: The Last Knight opening in June. Its prequel, Transformers: Age of Extinction, was our second highest-performing film, and it achieved RMB 320 million in China. After that, we will have Spider-Man: Homecoming. Other exciting titles in 2017 include Wonder Woman, Thor, and the Justice League, to name a few.
Looking at some exciting Chinese content, we are all looking at those titles, such as Wukong, Europe Raiders, The Thousand Faces of Dunjia, and The Legend of the Demon Cat. Clearly, there is no shortage of content well-suited for release in IMAX. Furthermore, in addition to Hollywood and Chinese content, we are also seeking ways to add alternative content as a means for complementing our blockbuster content. As many of you know, we have created commercial film funds alongside China Media Capital, which is expected initially to be capitalized with over RMB 100 million. We are still waiting final business license on the funds. However, have begun the diligence phase, and we have several exciting titles that are under consideration. Also, as you have seen, our parent company signed a deal with Marvel to launch the Inhumans franchise, with the first two episodes being shown exclusively in IMAX theater worldwide.
While the specifics of this release have not been finalized in China yet, we hope that this type of alternative content will be a bigger part of the company's strategy moving forward, and we hope to continue forging strong partnerships with the biggest names in the industry. Needless to say, there are a lot of exciting things happening on the content front, and I'm so confident we will have more to announce in the coming months. Stay tuned. With that, I will pass it back over to Rich.
Thanks, Jiande. Before I turn the call over to Jim, I'd like to touch on our virtual reality initiative, which we officially launched this year with the opening of our IMAX VR center in L.A. last month. While it remains in a pilot phase, it has been very well received by consumers. In fact, our L.A. facility has seen over 7,000 unique visitors with a 90% satisfaction rate. These are fantastic preliminary results, and we're already exceeding our initial expectations. We view virtual reality as a natural extension of IMAX, given our loyal fanboy audience and the association between IMAX and immersive, entertaining experiences. Since we announced our VR strategy, there's been strong interest in partnerships, content deals, and other interesting opportunities.
Unlike many other VR offerings out there which target the at-home experience, we are focused on the location-based offering, which has the ability to provide a broader array of high-quality, immersive content experiences with an added social component. These venues can stand alone, such as our venue in L.A., or put in movie theaters, shopping malls, hotels, et cetera. We're still very in the early stages, and the initial pilot locations will serve as learning experiences for us. That said, the initial feedback has been quite strong, and we're very encouraged by the early results. As many of you saw last week, IMAX Corporation signed its first VR agreement in China with our long-standing partner, Jinyi. The first location will be in Shanghai and should be open by the second half of this year.
As many of you know, location-based VR has already begun to be widely accepted in the China market, and there are more of these types of venues in China than any other market in the world. With that being said, the experiences in most cases tend to be on the lower end, and certainly lower-end than the IMAX experience. We believe our experience will be geared towards the higher end with respect to both the content and hardware, and will leverage our existing ecosystem to bring consumers the best VR experiences available. It's our goal to secure this high-end piece of location-based market. All in all, despite some transitory box office headwinds, we couldn't be happier with the level of activity we witnessed last year. This activity should provide meaningful upside during stronger film years, which we believe both 2017 and 2018 have the potential to be.
Moreover, we believe our ancillary new business will not only provide potential new revenue streams, but should help strengthen the core business as well and ultimately take IMAX to the next level. With that, I will turn the call over to Jim, our Chief Financial Officer.
Thanks, Rich, and thank you all for joining us today. As Rich mentioned, we had an extremely strong year with regard to signings and installations. With an abundance of promising blockbuster titles around the corner, we believe a significantly larger network will provide meaningful upside to our business in 2017. Looking first at our signings activity and backlog, we signed agreements for 238 theaters in 2016. Of this, 201 or 84% were for full revenue sharing arrangements or were for revenue sharing arrangements. Clearly, we have increased our revenue-sharing activity in a sizable manner over the past year or so, which we believe is a very positive development for the company. These rev shares provide for recurring annual revenue stream and allow us to capitalize on a promising film slate and in the upside of box office.
In terms of backlog, we ended the year with 334 theaters in backlog, 275 of which are for revenue sharing models. We are very pleased with the quality of our backlog in terms of partners and mix of locations. More importantly, as Rich mentioned earlier, the weighting of our existing backlog as it pertains to the mix of Tier 1- 4 cities is relatively similar to our existing network of 407 commercial theaters. So that based on our backlog, our mix of theaters across different tiers should not change meaningfully over the next several years. Our identified backlog, approximately 70%, are slated for Tier 1 and Tier 2 cities. Furthermore, while there is a big focus on tiers, we believe it is more important to look at specific locations.
A few of our highest-performing theaters in the country are in lower-tiered cities because the location is in a prominent high-traffic area, and there tends to be far fewer entertainment options in those types of cities. Moving on to installations. We installed 117 new theaters in the year, resulting in year-end network of 424 theaters, 407 of which are commercial theaters. Greater China is now our parent company's largest region by network size. Couple this existing network with our backlog, and we have 758 contractually committed screens in China. One thing I would like to remind everybody is that these JV theaters come with certain upfront costs like marketing and launch costs, generally in the neighborhood of RMB 50,000- RMB 60,000 per theater. We incur this expense on installation, whether the theater is installed in the beginning of the year or at the end of the year.
Given our installations tend to be back-end weighted with a large chunk occurring in Q4, we are recognizing these expenses upfront without the benefit of the theater having had time to generate meaningful box office. Please keep that in mind that these late-year installations tend to be more of a drag on current year earnings, with the real benefit occurring in the following year and beyond, where those upfront expenses are behind us and the theater is just operating with depreciation expense or in the case of hybrid revenue sharing with no system expense at all. This impact is really apparent in a year like 2016, where we had 34 more full revenue sharing installs than in the prior year and faced a weaker film slate. That said, we could not be more excited to have 261 JVs in operation going into a year as promising as 2017.
Another factor relating to installations that I want to remind people of is the ramp-up period for new theaters. When we install a new IMAX theater, it generally takes approximately 24 months before the theater reaches its full potential. This generally is not as impactful. However, when you have a year with 55% more installations than the prior year, this factor becomes more meaningful. With that said, many of our theaters installed last year should be hitting full stride amidst more promising film slates like 2017- 2018, which is great. Moving on to film results. Our annual box office came in at $296 million, which resulted in a PSA of roughly $932,000 for the year.
This is below where we came in last year, as our per screens were negatively impacted by a weaker overall film slate, RMB depreciation of around 7%, and the inherent ramp-up time for our newly installed theaters. Nonetheless, given how the 2017 slate looks, we are optimistic that PSAs will grow this year versus last year. PSA and GBO growth should allow us to leverage the relatively fixed cost structure of the film business side, which varies primarily based on the number of films and marketing. Turning it over to our financial results. Our full-year revenue came in at $118.5 million, with $47.9 million coming from sale arrangements, $30.9 million coming from revenue sharing arrangements and $11.7 million from maintenance and $26.8 million coming from our film business. Our total gross profit for the year came in at $69.3 million, resulting in a gross margin of 58.5%.
Revenue sharing margins were 46.6%, which again were negatively impacted by the sizable increase in installations over last year, coupled with weaker box office and per-screen averages. Film margins were 65.6% and were primarily down because of weaker box office, five additional films remastered in China, plus additional marketing costs. With that said, we expect 2017 to have a similar film count to 2015, given many of the promising blockbuster-type titles this year should play for longer windows than many of our counterparts last year. Moving on to OpEx. SG&A, excluding stock-based comp, came in at $15.2 million for the year, which is up $3.5 million over last year before IPO costs, primarily due to increased facility costs and professional fees as a result of a first-year public company.
Stock comp was RMB 1.9 million, and our adjusted net income was RMB 37.6 million, with adjusted EBITDA coming in at RMB 61.2 million. We also saw RMB 28.8 million in CapEx in 2016, primarily reflecting the installation of 64 full revenue-sharing theaters. Looking at the balance sheet, we ended up with RMB 106 million in cash. In terms of guidance for 2017, we expect to install approximately 120 theaters in 2017. In fact, the weighting of our installs should be similar to last year as well, with roughly 65 full rev share installs, 20 hybrid rev share installs, and 35 sale-type installs. We also expect SG&A growth, excluding stock-based comp, to come in roughly 8% over last year.
One last thing I'd like to mention before turning it over to Q&A is that at the beginning of the next half, we will be implementing a new reporting structure that will reclassify certain line items in the segment breakout, which is reflected in the management discussion and analysis section. We believe this new structure will streamline how the company's financial segments are presented. Please note that we're solely reclassifying some of our line items, and there's no change to the company's operating segments. Nonetheless, let me highlight a few of those changes. From a technical perspective, the biggest change as a result of this reorganization is the upfront revenue recognized on hybrid sales will now be included in the system sales line as opposed to the revenue-sharing arrangements line. This should make more sense for people, given this upfront revenue is not directly correlated to box office.
On the network side, we plan on simplifying the disclosures to enable you to see a clear correlation between box office and actual IMAX revenue. We'll be combining our revenue-sharing arrangements revenue line item with our film revenue line item, which will provide a clear picture into our straight box office sharing revenue. Our hope is that you'll find this significantly more straightforward, intuitive versus how it's laid out today. This change in reporting structure will likely go into effect Q1 for our parent company, and we're expecting the first half for IMAX China. All in all, there's lots of exciting things happening at IMAX China right now. We have a vastly larger network and backlog than we did at this time last year. IMAX indexing is healthy with our last five films in our top 10 Hollywood films in 2016 averaging over 12% of the PRC box office.
We're looking at a solid 12 months of what we hope to be blockbuster-level content, and we're in the early stages of some new business items such as virtual reality, which could prove to be a meaningful area of growth for the company in the future. With that, I'll turn it over to Q&A.
Well, thank you. If you would like to signal with phone questions, please press star one on your touch-tone telephone. If you are joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that will be star one if you would like to signal with questions. Please star one. Our first question will come from Wendy Huang with Macquarie.
Thanks, management. It is Wendy Huang from Macquarie. Thanks for the color you just shared on the imported movie. With also some good Chinese movie actually for 2017, can you actually share your view on the box office outlook for China you have? Also, how should we translate that into the revenue impact on the IMAX? Also, given the different installation and also the revenue sharing mix shift, how should we expect the PSA or revenue per screen to actually trend in the first half in 2017? Thank you.
I do not think we could break it down by half because we are not sure when the movies are going to get in, especially the Hollywood movies. As you know, that is subject to China Film Administration, so I cannot predict when they come in. But we are quite confident of the film slate this year. As Jiande said when he went through it, we are not only confident because they are good movies, but we are confident because they are movies that have performed in China before or sequels to them. So Transformers and Furious 7 were two of the best movies at box office and in IMAX. Our indexing was good in the history of China. To have sequels to both of those is extremely encouraging. Then when you look at the rest of the movies, Jiande went through the slate earlier, I think we are optimistic.
Also, the year started on a better note than the year ended. So we had very high-end indexing for a number of the movies. Journey to the West, for a local movie, did extremely well. Some of the movies in the fourth quarter, Doctor Strange did well and Fantastic Beasts and Where to Find Them did well. Xander Cage, xXx, we were very surprised with the results.
I think we feel very good about the box office for this year. It's the movie business, so there are no guarantees, but I would be surprised if our PSAs weren't up from last year.
Thanks, Rich. Just to follow up on that point. I think last year, your underlying box office growth in the RMB term was kind of flattish versus overall market growth of 4%- 5%. I think that was partly due to The Mermaid that you didn't really exhibit last year. This year, how can you actually better capture the momentum of the Chinese movie? You mentioned the Journey to the West, which had a good start this year, but alongside Journey to the West, actually there are three movies in China recently also generated, I think, around RMB 700 million to over RMB 1 billion box office in China. So, how can actually IMAX China better capture the momentum of those Chinese movie and also the tier city shift that we are seeing in the box office market?
First I'll ask Greg Foster, who is on the board of IMAX China, to put it in some perspective, and then I'll ask Jiande if he wants to add anything.
Two points. First of all, on how we can be a better part of the local language Chinese films. We've made a decision, you pointed out Mermaids, it's a fair point to make. We are going to start looking at movies before we choose them. We did that with Journey to the West 2, and that was obviously the right decision. It was by far the biggest grossing film over the Chinese New Year period, which wasn't the case the previous year. We saw that movie and made that decision afterwards. As it relates to what we can do to help get movies that will play in tier 3 or 4 cities, I'm going to leave that to Jiande and Rich. But again, what I can tell you is we are committed to local language films.
We're committed to marketing those Chinese films as well, and we realize that the Chinese marketplace to succeed, you must be able to have both Hollywood films and Chinese films, and that's what we intend to do.
Jiande?
Yeah, I totally agree with what Rich and Greg said. Because Chinese New Year obviously is the biggest season, biggest window for the box office. For IMAX, we are facing the kind of challenge because normally we only pick one at a time. So we are carefully looking into this, and we believe with our knowledge, hands-on experience and close working relationship with the different Chinese studios, we believe we can pick the best one. What you have seen, the box office number for the Journey to the West 2 is such an example. Moving forward, we are continuing to work closely with the Chinese local studios.
Okay, operator, next question.
Thank you.
Certainly. Our next question will come from Angela Zhou with Credit Suisse.
Hi, management. This is Angela from Credit Suisse. I wanted to ask your view on the new signings, going forward. Would you consider extending the full revenue or hybrid revenue-sharing partnership with more exhibitors? Thank you.
Yes. As a matter of fact, as you know, the balance has tipped, and now most of the theaters in China are revenue share deals. After last year's signings level of 238, which was two years combined, in theory, we would get concerned that we were starting to penetrate a lot. I have got to tell you, the level of activity in China going on and the number of inquiries is quite encouraging. I think that 2017 will likely surprise all of us by keeping up the momentum.
Okay, thanks.
Our next question come from Yi Dai with Goldman Sachs.
Hi, Jim, Rich, and Jiande, thanks for the presentation. This is Stephen Laszczyk from Goldman Sachs. I have a question about the pricing of the ticket. As we see, the 2016 PSA was down by about 31%. If you compare with the overall China market, PSA is down by about 20%, even you include the negative impact of RMB depreciation, IMAX China seemed to drop much higher than the market. Could you help us break down the factors of PSA declining? How much is from the pricing declining and how much is from the occupancy rates declining? On the pricing side, I heard that in 2016, IMAX had a lot of price cut on promotion due to the overall ticket price in China was declining because the subsidiary from the ticket platform was declining as well.
What is your expectation for this year's pricing on IMAX price, and what is the absolute number now?
I am going to answer part of the question, and Jim will answer part of the question. As you know, there is dynamic pricing in China, meaning that the better the movie, the higher the price. Last year, because the movies were not that good and we did not get involved in some of the biggest ones, that put pricing under pressure. However, I do not think that is a long-term trend. When you get beneath the data and you separate 2016 into pieces, you find out that the first half of the year did extremely well until Alice Through the Looking Glass, and you find the end of the year did very well, where tickets were priced very well. As I said, so far this year, you see the same trend continuing.
I don't think there's anything systemic as it relates to IMAX, but it relates more to the nature of the movies last year. Also, as you said, if you look at it on a constant currency basis, it's more consistent with the drop in the Chinese box office in general than it is when you look at it when it's converted into dollars because of the depreciation. Jim will talk about how that splits into pieces.
Sure. Thanks, Rich. Just quickly following up on that. As Rich said, 2015 was a powerhouse year in terms of the film slate, in terms of the demand for the ticket pricing, and as a result, the dynamic pricing, as Rich talked about beforehand, definitely played to our advantage. We don't set the pricing, as we've talked about before, XuFu, our exhibitors do. Having said that, we keep an eye on things. The reality is we did have a lot of new theaters that were coming online this year as well, not just in tier 3 markets, but in tier 2 markets. As they're launching new theaters and new complexes, they'll offer certain types of promotions in place to get those theaters going. I think that's normal.
We had a disproportionate number of theaters that came online this year versus what would have happened overall in the market. As Rich said beforehand, I don't think it's anything systemic in any way. It's got a lot to do with FX. It's got a lot to do with the dynamic ticket pricing, and I think it's got a lot to do as well with just the sheer number of theaters that are coming online that are just offering certain temporary promotions to bring people to the complex, and I think that's common in new greenfield development.
Okay. Thank you. I have the second question about the VR experience. Could you elaborate more on the economies on this VR center, the first one in L.A., and the coming one in Shanghai? How much investment per center and how much the price would be, the output would be, and to reach the break-even point, how many users per annum you need? These are about the VR economies. Thank you.
The investment is somewhere between $250,000 and $400,000. The price to the public is about $1 a minute. So a 7-minute experience is $7, and a 10-minute is $10, et cetera. It is in its early stages, so all of this is subject to change. Most of it is on a model, not in the real world. It also depends on whether it is a standalone facility or it is integrated in a multiplex. But in our models, again, which are not China-specific, we think at about $750,000 in annual revenue, the exhibitor and IMAX make a very healthy return on the investment. But again, these are pilot centers, and we are trying to verify the assumptions in the model. So we need to make sure what the throughput is, the elasticity of demand, how long you have to change out content, how it varies market by market.
But I wanted to give you sort of general parameters.
Okay. Thank you, Rich.
Our next question comes from Arch Pei with UBS.
Thank you, management. Congratulations for a good result. Two questions. The first is that do you have a breakdown of your filters in backlog and your planned openings in 2017 among tier 1, tier 2, tier 3, and lower-tier cities? What is your perspective of profitability and PSA in lower-tier cities? Because people widely believe that tier 3 and lower-tier cities would be the growth engine of China film markets in the coming years.
Sure. As I mentioned earlier in my points, about 70% of our identified backlog right now is going into tier 1 and tier 2 cities. Right now, our network consists predominantly of tier 2 and tier 3 cities with a smaller proportion of it in tier 1 cities overall. We do feel that as we roll out our theaters going forward, we're going to maintain similar percentage of network in tier 1 and tier 2 and tier 3 and tier 4 cities. It shouldn't change substantially in the next few years. In terms of revenue from those particular sites that we're going into, again, we've had a historical success in tier 2 and tier 3 cities. That's sort of been where we've been operating for the last little while. We expect to continue to operate that way in the future.
We think it's got much more to do with what locations we're going into and what partners we're working with rather than what particular tiered city we're in. In other words, I'd rather be in a great location in a tier 3 city or even a tier 4 city than a sort of a below-average location at tier 1 city. We carefully monitor that. We're working with the best of the best in terms of exhibition clients. As Greg mentioned earlier, Chinese films which play well in tier 3 and 4 cities is a very important part of our strategy in the past and will continue to be in the future. We expect that to reflect well in the box office going forward.
With that does-
Hello.
I'm sorry. Go ahead, sir.
Yeah. I have a second question. I noticed that the gross margin of your sales type theaters also dropped a little bit last year, along with your revenue-sharing theaters. Is that because of the upgrading of laser systems, which has led to higher cost, or is that temporary or structural? Where would your gross margin of sales type business be in the next few years, do you think?
Yeah. No, there's nothing systemic in the margins. We installed some lasers at higher costs, our big GT lasers last year, which impacted our margins. On the rev share side of things, we installed 34 additional rev share arrangements, as I mentioned before in my comments. They have upfront costs associated with them. Could be $50,000-$60,000 per theater. When we're installing those theaters and we're not generating revenue for an entire year, but we're booking those costs, that has an impact overall on our margins. The fact that we have a much larger network of revenue-sharing theaters and the depreciation associated with that, and we didn't get the benefit of increased box office, had an impact on our margins.
Overall, nothing systemic in terms of pricing on our sale theaters, or anything systemic in the revenue share, just sort of how it worked in terms of how everything played out this year.
Justin, maybe we will take one last question.
No problem, sir. That question will come from Mandy Chan with Bank of America.
Hi, good evening, in the U.S. My question is that I believe one of the anticipated event this year is China may increase the import film quota to foreign studios. Wondering if management team has heard anything on the ground, or how will that impact the industry and IMAX China overall. Thank you.
We read press accounts coming out of China that indicated that they would increase the number of films. I don't know if they're true or not. However, if you remember the history, this all comes out of an agreement arising out of the WTO ruling, which required China to liberalize its import issues around films. So five years ago, the existing quota was set, and around now it's supposed to be renegotiated. I don't know where it's going to end up, but I would be very surprised if it didn't end up in a place where there was more flexibility for companies like IMAX to bring in more films and to get more marketing and to have more control over things like dates of release, just because of the origination of this negotiation, where it's gone and how it's set up.
But in terms of concrete information, as I said, all I know is what I've read coming out of China, but I think it's way more an opportunity than it is a risk.
How's the Hollywood? Because last time, when we recall, the Hollywood studio actually got a higher sharing rate. Do you think it will play out this time as well?
I think there are three or four major issues to be resolved. One is the import quota, one is the dating of films, one is the role of the government in regulating release dates. Another is obviously, the blackout periods. And I think some of those will get better for people like IMAX, but I can't predict what the trade-offs are going to be. I don't know if three of the four or two out of the four, as you mentioned, the take rate. As I said in response to your last question, I think it'll get better in some ways, but certainly not in all ways. And I think we're going to have to wait to see.
Thank you. I have one more question, if I may.
Sure.
It's for the 2017, the installation guidance is 120, actually, which is higher than the number of installed last year in 2016. Because as I mentioned in opening remarks, that actually makes some earnings drag in 2016 as well because of the higher installation. We expect new installation could hurt the earnings or will be an earnings drag again this year, or even larger earnings drag. We much very rely on the box office this year, and then hopefully it will rebound. I think one thing is that I didn't quite get it is the screen growth, or in overall China box office, actually screen growth doesn't really relate to admission growth because the admission per screens has been declining and/or the revenue per screen has been declining as well.
How do you actually see the demand for moviegoing in China for this year or in the latter part of last year? Actually, the demand for moviegoing, do you see there's any changes or any consumers actually engages in other form of entertainment activities like video games or video broadcasting, et cetera, more than going to theaters?
When you look at the statistics of how many times people in China go to the movies versus other countries, not only North America, but the vast majority of countries in the world, the Chinese are on the low side. Their repeat visits, their number of times a year, are just way below what it is in other countries. I don't think this is a long-term trend. I've been involved with IMAX for 23 years, and what happens is when there's a good year, everybody thinks it's going to be a good year forever. When there's a bad year, everybody thinks there's change in moviegoing habits. In China, it's been wonderful because of the build-out and because the supply of great films has been great. This is the first time that China's experienced any kind of an off year.
In the rest of the world, that's the natural order of things. China was so hungry for the content that people got accustomed to every year going up irrespective of the content. Personally, because I've been doing this for a long time in 74 countries, I don't think there have been changes in moviegoing habits. As I said, if you look at part of the first quarter, although it's early, we've seen that actually, so we're not just guessing. I don't believe at all that there's been changes in moviegoing habits. I think there were changes in the kind of content, and looking at the film slate this year, I think it's going to be a lot better. Jim, what do you want to add?
Yeah. No, I think last year, Mandy, more movies were released than ever before. As a result, some content was watered down a little bit, as Rich said. I think tastes are a little bit more discerning in terms of the type of movie people are watching. By no stretch of the imagination, do I think people have turned away from the movie, and they've always had those other alternatives, whether it be gaming, whether it be online stuff or anything else. But movies are a part of the sort of lifestyle development, which is going to be getting a lot of attention in China this year and going forward. I think, again, it's going to remain the center and the focus of that. When the Chinese consumer gets the movie that they want, they definitely go out and they watch it, and then some.
I do think the weaker slate had a big impact last year overall. Just quickly touching upon your first point, Mandy, about whether we think we're going to have a drag on earnings next year because we have more theaters. I think we're benefiting from a larger network to start with right now. We're going to be going into the year with 407 commercial theaters opened. A lot of those theaters that we opened up in Q4, November and December, we're going to get the benefit of an entire year's worth of box office from those. The base of network and the base of theaters is getting bigger, which will hopefully offset some of the drag that we're going to have on these new openings that are happening this year.
Again, I prefer all things being equal to get those theaters open in November and December so we can take full advantage of it this year, which is set to be a great year of films and obviously going forward as well.
Thank you.
Well, thank you. That does. Oh, I'm sorry. Go ahead, sir.
Yeah. I was just going to sum up, say that the way we analyze our business in China and both on a global basis, there are kind of two things we look at. One is network growth and sort of the value of the network. In China, where we now have 407 theaters open, signed 238, and have a backlog of 304, it just couldn't be more robust. That's a long-term indicia of how healthy it is and the growth in our network. In the short run, the box office will vary from year- to- year, but based on our experience, it tends to do that within a range. Portfolio theory applies. You have some movies that are better than you thought and some that are worse, and some years that are better and some years that are worse.
But over the long term, if you grow your network in a predictable fashion and you stay within those ranges, the year- to- year is a lot of noise, but the ranges themselves provide predictable long-term cash flow. You take that with the new businesses we've added on. I'm hesitating because I don't want to seem to be overselling, but our growth in China is remarkable. China's bigger than any territory in the world. You look at what we've accomplished in five years and the size and the power of this network and our relationships with the studios and with filmmakers and the slate this year. I think one half of a year in box office is a distraction, and we couldn't feel better about the overall business. Anyway, thank you all for joining the call.
All right. Well, thank you. That does conclude today's conference call. We do thank you for your participation today.