Good day, and welcome to the IMAX China's first half 2018 earnings conference call. 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'd like to turn the conference over to Mr. Michael Mougias, Vice President of Investor Relations. Please go ahead.
Thank you, Stephanie, and good morning, everyone, and thank you for joining us on IMAX China's half year 2018 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 USD 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 half-year 2018 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, Mike. Our first half results were very strong, benefiting from our differentiated consumer experience, continued network expansion, and our refined programming approach. During the first half, a compelling mix of blockbuster content drove IMAX China box office to $190 million, a 13% increase compared to the first half of 2017. Over the past few years, studios from Hollywood to China have increasingly emphasized blockbuster-type content, while at the same time, consumers have increasingly expressed interest in experiencing this content in a differentiated way. We believe IMAX is uniquely positioned to benefit from these two trends, and our recent results help illustrate this point of view. Looking at our first half results in more detail, continued box office and network growth, coupled with our ongoing focus on controlling costs, resulted in notable operating leverage.
Gross margins of 72% were up 880 basis points compared to the first half last year, while adjusted net income of $21 million increased 20%. Furthermore, at the end of May, we distributed a $14 million annual dividend, the company's first dividend program, underscoring our strong balance sheet and ongoing confidence in IMAX China's future earnings potential. On this note, we are pleased to announce the board-approved payment of an interim dividend for the first half of 2018 in the amount of approximately $6.8 million, which calculates to two cents per share or approximately HKD 0.16 per share. As we articulated on our last call, improving the box office productivity of our network in China is a key priority for the company. Over the past six months, we've refined certain aspects of our business to better adapt to the evolving cinema landscape in China.
For example, we refined our programming strategy to include more Chinese content. Given the growing prominence of Chinese blockbusters and the varying tastes of consumers in different cities, we believe being more nimble and offering our exhibitor partners more programming flexibility will improve the box office productivity of our theaters. For example, during the recent Chinese New Year holiday, we played the three highest grossing Chinese titles, which drove a 74% increase in IMAX box office compared to the same Hollywood period last year, where we played only one film. During the first two weeks of this month, we played several Chinese titles, including Animal World, Dying to Survive, and Hidden Man, which collectively generated $13.6 million in IMAX box office to date. Tomorrow, Detective Dee: The Four Heavenly Kings and Hello, Mr. Billionaire will hit IMAX screens across China.
We are encouraged by the early results of this strategy and intend to broaden the scope of our local language offering going forward. Another initiative of the company is to work more closely with the key ticketing platforms in China. Given the majority of industry tickets are sold through one of these two major platforms, as we work to improve IMAX's positioning on these platforms, we believe we will be able to sell more IMAX tickets and expand our audience. Furthermore, we are also working more closely with our exhibitor partners to tailor our programming and marketing to better appeal to the varying tastes of consumers across different cities in China. Collectively, we believe these efforts will increase the box office generation of our theaters.
In addition to increasing the productivity of our existing network, growing our footprint remains a key priority, and we continue to see demand for new IMAX theaters across China. We signed agreements for 34 new theaters in the first half, bringing our quarter end backlog to 318 screens. Underscoring this activity was a 30-theater agreement with our longstanding partner, Jinyi. Jinyi is currently our third-largest exhibitor partner in China, and our recent deal with them marked their seventh agreement with IMAX since 2010. In addition to having partnerships with virtually every major exhibitor in China, it is also encouraging to see our largest partners and some of the most prominent exhibitors in China continue to come back for more IMAX screens. We believe this demonstrates the differentiation of the IMAX experience relative to other options and helps validate IMAX's value proposition in China.
Moreover, our growing backlog of theaters affords us visibility into future installations, which is a key driver to box office and earnings long term. Importantly, we continue to see robust activity from a variety of exhibitors across China, and we remain in active discussions for additional signings. In fact, we are closing a 14-theater agreement with a subsidiary of a large state-owned entity for our new IMAX with Laser experience shortly. In addition to this activity, we also installed 25 new theaters in the first half, bringing our total commercial network to 552 systems. Overall, our backlog of over 300 screens, coupled with our continued signings momentum, should facilitate robust installation momentum in the years ahead.
In addition to our strong financial performance and network growth, we also achieved several strategic milestones in the first half, which we believe will further enhance the IMAX value proposition and increase our box office generation long term. First, IMAX Corp successfully launched IMAX with Laser, which combines our innovative new laser projection technology with our upgraded 12-channel immersive sound system. IMAX with Laser is aimed at further differentiating the way people see movies, widening the gap between the IMAX experience and other options. We believe IMAX with Laser provides several strategic and financial benefits. First, our new system delivers a noticeably sharper image compared to what is available today. Most importantly, you don't have to be a cinephile to appreciate the superior quality of IMAX with Laser.
In addition to the differentiated consumer experience, IMAX with Laser also equips filmmakers with more creative flexibility, enabling them to present sharper images and more exotic colors in the IMAX format. This is particularly important given the growing number of blockbusters that are filmed with IMAX cameras. Over the past several months, we've been hosting demonstrations of the new system with directors, studios, exhibitors, and other key stakeholders who have uniformly provided very positive feedback. Ultimately, the best initial indicator of its value proposition is the early response from our exhibitor partners. For example, at IMAX Corp, we've already signed agreements with some of the largest partners, including AMC, Regal, and Pathé, who collectively have signed on for over 160 IMAX with Laser systems since its launch in April.
We believe these agreements help validate the IMAX with Laser proposition and serve as a testament to its differentiation from a consumer standpoint worldwide. In China, we installed our first IMAX with Laser theater with Wanda in Shanghai at the end of June and have hosted many exhibitors, studios, key opinion leaders, and fans to view our technology. Feedback, like in the U.S., has been terrific and extremely positive. On the financial side of the equation, we developed our IMAX with Laser technology at a modest incremental cost to our xenon-based projectors. For example, we anticipate sale and hybrid deals to have a similar upfront margin profile in dollar terms to our existing xenon system, while we also anticipate higher take rates on JV deals compared to xenon.
Furthermore, IMAX with Laser affords us the opportunity to extend contract terms with our exhibitor partners, locking in DMR and JV revenues for an additional 10 to 13 years upon installation or upgrading existing sale locations. Another strategic priority for IMAX officially kicks off this week with the launch of our global brand campaign. Of all our achievements over the years, one area that I have always believed we could strengthen was marketing. I am confident that our new brand campaign will change that. The campaign inspires audiences to experience films to their fullest, to experience them in IMAX. Our immersive experience enables consumers to see blockbusters the way the filmmaker intended, and this campaign is focused on how to more efficiently communicate that to moviegoers around the world.
We want every audience to see the IMAX difference and understand what has continued to set us apart since our inception 50 years ago. With an innovative rollout led by digital marketing, this will be our most comprehensive brand campaign launched to date. It will launch in 77 countries and 39 languages. I am pleased to note the early response from our partners has been outstanding, and in fact, many of them have funded on their own additional advertising around our campaign. Overall, we are excited by our partners' support of our brand and look forward to working with them to drive incremental ticket sales for the IMAX experience. Of course, we will update you on our progress in the future. Overall, we are encouraged by our strategic progress and financial performance during the first half.
Looking ahead, we believe IMAX is uniquely positioned to benefit from several industry trends, including the growing prominence of blockbuster content around the world and consumers' increasing desire to experience that content in differentiated ways. We believe these trends, coupled with our playing more Chinese content, more effectively markets our brand, and with our more effectively marketing our brand and introducing a more differentiated experience through IMAX with Laser, will drive incremental traffic to IMAX theaters and further increase the earnings power of our business. At the same time, our robust backlog and continued signings momentum will fuel future network expansion in the years ahead. Overall, we are encouraged by our recent progress and look forward to continuing to grow the IMAX value proposition in China. With that, I will turn it over to Jiande.
Thank you, Rich. A diverse mix of robust content from Hollywood and China generated USD 190 million of box office in the first half, which is up 13% compared to last year, despite the underperformance of Star Wars: The Last Jedi and Solo: A Star Wars Story. With that said, Avengers: Infinity War became the highest-grossing IMAX film of all time in China, generating USD 45 million of box office in the first half. As Rich mentioned, Avengers was also the first film shot entirely with IMAX cameras. When films are captured in our aspirational, customers can see more image exclusively on the IMAX screen, which further differentiates the IMAX experience. Over the years, there has been an increasing number of Hollywood titles that have included exclusive IMAX DNA, which has increased our market share on key films.
Looking ahead, we believe an opportunity that could facilitate additional growth in box office is to introduce IMAX DNA into local language blockbusters. I am pleased to note that last month, Wanda announced their plan to film Detective Chinatown 3 in China with IMAX cameras. For those that do not know, the prequel was a huge hit during the recent Chinese New Year period and generated $542 million of box office through the entirety of its run. If we can work more closely with the prominent Chinese producers and directors, we believe we can grow our market share and increase our association with local language blockbusters. Given that growing production value of local content, we believe this could be a meaningful opportunity for the company down the road.
Overall, we are pleased by the progress we have made in China over the past six months and believe the strategic initiative that Rich laid out, coupled with macro trends such as studios' growing emphasis on blockbuster content, should increase the box office generated across our network. We look forward to updating you on our progress over the coming months. With that, I will turn it over to Jim.
Thanks, Jiande. , and good morning, everyone. Our first half financial results benefited from our multi-film programming strategy, continued installation momentum, and our ongoing focus on controlling costs. Collectively, these initiatives helped drive adjusted net income to $21.3 million, a 20% increase compared to the first half of 2017. Adjusted net income margin expanded 700 basis points to 41.3% compared to the same period last year. Looking ahead, we believe that the strategic initiatives that Rich and Jiande highlighted, including the launch of IMAX with Laser, our refined programming strategy, the new brand campaign, and our working closely with the key ticketing platforms will further differentiate the IMAX experience and increase the earnings power of our business long term. Looking at our first half results in more detail, beginning with our network growth, we signed agreements for 34 new theater systems in the first half.
Broken out by deal type, five of our signings were for sales type, 21 were full revenue sharing, and eight were for hybrid revenue sharing. We ended the first half with a backlog of 318 systems. Turning to our installations, we installed 25 new theaters in the first half. Of these installations, eight were sales type, 15 were full revenue sharing, and two were hybrid revenue sharing. Our installs in the first half were below that of last year, primarily related to timing. Before we dive into financial results, I would like to clarify some accounting changes that took effect in January 1st of this year. IMAX China adopted IFRS 15 revenue from contracts with customers. As such, the presentation of our first half results this year are not apples to apples with the presentation of last year's first half results.
The new IFRS accounting standard will primarily impact our network business revenue and associated cost of sales with respect to the conversion of Hollywood films. In the first half, $2.2 million of DMR conversion costs from Hollywood films were recorded as a reduction in film revenue rather than an increase in DMR cost of sales. This effectively reduced DMR revenue and costs by $2.2 million. The impact was neutral from a gross margin dollar standpoint. However, it resulted in a 300 basis point increase in gross margin as a percent of revenues compared to the gross margin without adjustment. With that clarification, turning to our financial results, we delivered total revenue of $51.5 million in the first half. That was in line with the first half last year.
While box office growth of 13.2% drove an increase in network revenue, this was mitigated by adoption of our new revenue standard as discussed above, coupled with our installing four fewer sale-type installations in the most recent period. Our network business revenue, which is driven by box office and is recurring in nature, increased nearly 6% to $27.2 million compared to the same period last year. Network business margins of 71.5% increased 950 basis points from the prior period, driven by operating leverage and the impact of adoption of the new revenue standard as described above. The theater business revenue for the first half was $24.2 million, 6% less than the first half of 2017 as a result of four fewer sale installations offset by increased maintenance revenue from a larger network of theaters. Theater business margins of 72.5% increased 820 basis points from the prior year.
This increase was the result of a $0.1 million increase in revenue per sale installation from 2017, lower system costs due to foreign exchange, and inherent operating leverage from a growing network in our net maintenance business. Our resulting total gross profit was $37 million, up 13.7% compared to the first half last year. Total gross margins were 71.9%, up 880 basis points compared to the same period last year. Overall, we remain focused on growing our network box office and continuing to demonstrate operating leverage for the business. Turning to our operating expenses, SG&A, excluding stock-based compensation, came in at $7.1 million, a 3.8% increase compared to last year. This increase partially reflects our allocating more dollars to various marketing initiatives, which, as articulated earlier, is an area of strategic focus that we are investing more in this year.
Stock-based compensation of $1 million was largely in line with that of last year. Our effective tax rate was 22.5% in the first half, roughly the same as the first half last year. Adjusted net income was $21.3 million, up 20% compared to last year, with adjusted net income margins of 41.3%, 700 basis points higher than the first half of 2017. Adjusted EBITDA in the first half was $33 million, which was up 8% year-over-year, and adjusted EBITDA margins were 63.7%, up 500 basis points over the prior year as well. We ended the first half with a cash balance of $116.6 million. Our core business continues to generate healthy cash flow from operations. Cash provided from operating activities for the first half was $17.8 million, up from the $17.2 million provided in the first half of 2017.
Cash flow used in investing activities primarily to fund joint revenue-sharing equipment was $4.3 million as compared to $10.6 million in the prior year. As Rich mentioned, in light of our strong cash position and management's ongoing confidence in our ability to grow earnings long-term, the company paid a final 2017 dividend in the first half of the year of $14 million, which calculates to roughly $0.04 per share or approximately HKD 0.31 per share. As indicated by Rich earlier, in light of the strong cash flow being generated by current operations, our board approved payment of an interim dividend of approximately $6.8 million or $0.02 per share or approximately HKD 0.16 per share. Before I turn the call back to the operator, I would like to reiterate our full year 2018 guidance.
Beginning with installations, we continue to anticipate installing roughly 105 new systems this year broken out by deal type. We anticipate roughly 55 to be full JV, 13 to be hybrid, and 37 to be sale type. We continue to expect SG&A, excluding stock-based comp, to grow 9% compared to last year, which is primarily related to our new marketing initiatives. Overall, we are encouraged by our recent financial performance. We continue to believe our signings and installations momentum, coupled with our introducing more Chinese titles into the slate and maintaining cost discipline, will increase the earnings power of our business. Furthermore, we think the launch of a more differentiated technology and a new marketing approach will increase the IMAX value proposition for all of our stakeholders long term. With that, I will turn it over to the operator for Q&A.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. We will go to Marcus Young with Macquarie. Please go ahead.
Yeah. Thanks, management, for taking my questions. I have two questions. First of all, with regard to your market share, can you share a bit some data points on your market share in foreign films and Chinese local films, respectively? Say, for instance, for "Avengers" and "Dying to Survive," respectively, what is your market share in these two films? Also, what is your strategy to increase market share in local films going forward? I guess I will talk about my same questions after this.
This is Greg Foster, and my response to that is, when we look at a movie, we really look at its grossing potential as opposed to its market share. Our market share can range anywhere from 3% or 4% to 12% or 13%. It really depends on what the film is and also if we're sharing screens. As you know, we've tried very hard to increase the volume of films that we have in the marketplace, given that, for instance, a movie like Dying to Survive, when it opened, and obviously it opened exceptionally well, it was playing on 90-plus percent of the screens available in the entire country. So IMAX's 500 and something plus screens are a mere fraction of the number of screens that the film played on.
Our focus is really a little bit less these days on indexing and a lot more on revenue potential on box office. Rich, yes?
On the second part of the question, the strategy to increase it, as I mentioned during the comments, we're going to provide more IMAX DNA in China. We're making the camera available for Detective Chinatown. We're launching our brand campaign to educate people as to what the IMAX experience is, which will lead to additional market share. We're bringing in laser, which will provide a better consumer experience. As we also mentioned, we're going to work closer with the ticketing services in China to create more directed marketing towards those movies. If there's something-
Yeah, one other last thing. We've been talking about this. We actually spoke about it today in the board meetings. We're also going to start focusing much more on building our own relationships with Chinese filmmakers and Chinese production talent, including actors and actresses. Just like in North America, we've established these fantastic relationships with the people that actually make the movies, and we're going to start doing more of that in China as well. The cameras is an offshoot of that, but there's going to be many more steps in the process. I think you'll see over the next 12 to 24 months, much more of a traction within the community, particularly in Beijing.
Yeah, thanks. That's really helpful. My second question is regard to the new signings. I guess we talked about that in the remark a bit. The figure in the first half is 34, and that is compared to 86, the same period last year. Should we expect that the figure continue to reduce on year-on-year basis going forward? Could you remind us again that among all the backlogs, how do you and your partners decide when will you book this quarter or next quarter, et cetera? That's my question. Thanks.
Well, in terms of the signing, it's whatever quarter that happens. In terms of the installs, you generally set out a schedule at the time you do the contract, or in some cases, they're undetermined dates. But it doesn't go into backlog until you have a signed contract and either money or a creditworthy partner. In terms of the overall signings, I know your job is to look at a company on a quarterly basis or a half-year basis, but in the real world, there are variations from quarter to quarter. I mentioned the deal that we're about to sign for additional systems, which we'll be announcing shortly, but it didn't happen to fall between right now before the call. The level of activity in China is consistent with what it's been in past years.
As you know, our backlog is over 300 theaters, so we have installs backed up for a fairly significant amount of time. We don't think the fact that just because signings were down in any particular period, that it's indicative of the business climate.
Yeah, thank you so much. Just a follow-up here. When you stand at this point, you think that there is any potential possibility on changes to your 105 installations this year? If that's the case, it's going to be upward or downward revisions? Just try to get a sense here.
If we were aware of any changes, we would have told you on this call. We are, at the moment, projecting the guidance we have given before. Historically, the changes have been upward, and we do not see a different business climate at this time. But we do the best we can to give you guidance for the year.
Thank you so much.
Thank you.
We will move on to Timothy Li with CLSA.
Hi. Good morning, management. Actually, one of my questions was actually taken by the other analyst, so I only have one question remaining. It's just a small question on the sales arrangement. The average revenue I saw was increased from RMB 1.3 million to RMB 1.4 million in the first half of this year. I just wonder, what's the key reason for that? Would that be only due to the RMB appreciation in the first half? Other than that, would there be any other reasons? Thanks.
Yeah. It's a combination of the RMB appreciation, plus in addition to that, the types of deals that we're installing. So, we have certain deals with larger clients that may be at a lower margin than obviously, other deals with other clients, depending on volume and things like that. So it just has to do with the nature of the deal that we're installing at the particular point in time. But I think most important is the sales prices have been fairly consistent over a long period of time.
All right. Thank you very much.
We're moving on to John Choi with Daiwa. Please go ahead.
Good morning, guys. Thanks for taking my question. I have a couple questions here. When we looked at your multi-screen, multi-movie strategy since last year, could you guys elaborate a bit more on how this has impacted? Obviously, we could see from the positive box office performance, but can you reassess the results and how do you think what you guys have done well and what you guys still need to work on going forward in order to boost the grossings within the overall box office? The second is regards to, I think the management mentioned that laser installation is coming through, signed with a couple in Wanda and Shanghai. Wondering how this is going to have impact to our financials, like the revenue or gross profit margin and cetera. Thanks.
This is Greg. I will answer the first question, and I think then Jim will take the second question. Chinese New Year is a great example of it. Two years ago, so that would be Chinese New Year of 2017, we did one movie, and we frankly picked the wrong movie. We put ourselves in a position that the movie did okay, it just didn't do as well as the top movie. This last year, the year that we are in, 2018, we did three movies. We did "Operation Red Sea", we did "Monster Hunt 2", and we also did "Detective Chinatown 2". By doing those three movies, we were up 74% year-over-year from Chinese New Year 2017 to Chinese New Year 2018.
More importantly, or I don't think it's more important actually, but as a result of being up 74%, the reason we were up 74% is because one of the movies opened extremely strong on day one, and then unfortunately ended up petering out quicker than anticipated and didn't really have a tremendous amount of long-term attraction. The other movie, "Detective Chinatown 2", it stayed very consistent for the entire holiday and then after. A third movie started soft and ended up really growing during the holiday. If we only picked one movie, and let's say it was the wrong one, we would've been on the short end of the stick.
By having the flexibility and giving our exhibitors the flexibility to be able to program based on how advanced sales are going and based on, as you know, the market changing so swiftly, it gives us the ability to really bet on a wider net, a wider cast. But at the same time, to be able to protect ourselves and to hedge a little bit on the downside. Also to give ourselves the opportunity to really perform if something breaks out. I would say that "Operation Red Sea", for instance, would have been an example of that.
Going to-
You'll see more of that going forward. We're doing that now in the July and August break. We'll do it in October. We'll do it in December. We're not just going to pick one movie at a time.
Just going to the question on laser installations and its impact on revenue and margins. As Rich indicated earlier, there's going to be a modest incremental cost on the laser equipment that we're going to be installing. But we anticipate to be getting either higher take rates or higher upfront fees in association with that. So margin percentages may go down, but our absolute margin dollars should hopefully stay neutral going forward with laser. So that's how we view it impacting it with our clients going forward.
Once again, as a reminder to the audience, it is star one on your telephone keypad if you would like to ask a question. We'll move on to Brian Tye with Goldman Sachs. Please go ahead. Your line has been opened.
Thanks, Rich and the management. This is Xuva from Goldman Sachs. I have a question about the PSA. in the first half, it still declined by 12%. We want to know the management's view in the near term and longer term about the PSAs. Is the first half the trough for PSA?
The PSAs did decline in the aggregate a relatively minor amount, certainly less than they had in prior years. I think if you look at same-store sales over the course of the year, you would see less of a decline than you see in PSAs. Part of that is driven by the number of theaters that are opening, and we've talked before about the seasoning issue, that it takes a while for a theater to reach its potential. I think that partly accounted for it. From our point of view, it really stabilized during this period of time. I think it was a 4% move during the period. I think, as I said, I don't want to be repetitive, but given where it was the year before, my view is that it stabilized overall.
I am not concerned about it, and we feel good about where our performance is, driven mostly by the strategy Greg just gave details on about multiple films and more local programming.
There are no further questions in the queue. I'd like to turn the call back over to Mr. Rich Gelfond.
Thank you very much, operator. Just quick summary, we think the results in the first half of the year were excellent, very strong. Something to be proud of. I do not think we are doing a dance and jumping up and down. As a follow-on to the last question, I think we have done a lot of work that has helped turn around IMAX China, but I think there is a way to go going forward, and we have a strategy that is going to get us there. It includes our brand campaign. It includes IMAX with Laser. It includes dealing with ticketing platforms, refinements to our film strategy. What we have done so far has really made a difference, and I think what we can do ahead will make even more of a difference. Things like using IMAX DNA for cameras, working with directors.
We feel very good about the performance in the first half of the year and where the business is today, and we think we will feel even better as we go forward. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.