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Equity Research L O S ANGELES | S A N FRANCISCO | NEW Y O R K | B O S T O N | C H IC A GO | MINNEAPOLIS | MILWAUKEE | SEATTLE Movies and Entertainment October 31, 2016 Michael Pachter Alicia Reese Nick McKay (213) 688-4474 (212) 938-9927 (213) 688-4343 [email protected] [email protected] [email protected] Biweekly Review -- A Look Ahead from Late October and Our Take on Current Events in the Film Exhibition, DVD, and VOD Industries • Q4 box office appears to be tracking down 16.0% year-over-year. October ended down ≈18%, with best performing films The Girl on the Train and The Accountant collectively grossing $127 million to date (with Metacritic scores of 48 and 51 respectively) facing a tough comparison to last year’s The Martian (which grossed $228 million, and was much more favorably reviewed with a Metacritic score of 80). Boo! A Madea Halloween appears to be performing better than expectations (grossing $52 million to date), likely benefitting from a fewer number of Halloween releases this year. Doctor Strange has reportedly grossed $86 million overseas, which bodes well for the film’s US and Chinese premieres this week. Despite the potential for any individual film to outperform our expectations however, the overall comparison for Q4 to last year remains a significantly high hurdle, facing the first Star Wars title in 10 years, the Hunger Games franchise finale, Daniels Craig’s last James Bond performance, and several successful Children’s films. We are thus maintaining our estimate for Q4 of down 8%. • Q3 results: Regal and IMAX posted sizeable revenue and EPS beats, but a tough box office ahead and share appreciation heading into earnings likely weighed negatively on post-EPS reaction. Regal outperformed the industry box office in Q3, benefitting from its well-balanced footprint, market share gains driven by theater enhancements, and premium screens split evenly between IMAX and its own RPX screens ( view full note here ). IMAX beat revenue expectations in Q3 benefitting from some late-quarter theater installations ( view full note here ). The remaining exhibitors will report their results over the coming weeks. AMC will report its full Q3 financial results on Monday, November 7, after market close (having already previewed preliminary results). Carmike will also report its Q3 financial results on November 7 and release its results after market close. Cinemark will report its Q3 financial results on Tuesday, November 8, before market open. • Premium ticket comps appear difficult in Q4:16 and Q1:17, then more favorable in Q2:17. In Figure 1 on page 2, we compare the top ten films in each quarter to the prior year’s, denoting which was or will be available in IMAX or IMAX 3D. We anticipate another difficult comparison in both Q4:16 and Q1:17 for premium films. • IMAX’s solid domestic performance and expanding footprint will likely offset declining PSA’s in China. In Figure 3 on page 4, we take a look at weekend box office results in China for Q4 over the past few years, as well as the quarter-by-quarter growth in Chinese weekend box office over the past few years in Figure 4 on page 5. In Q4, we expect domestic IMAX to decline over the prior year, while in China we see an easier comparison than in the prior few quarters. We continue to believe that IMAX can achieve flat global DMR revenue in 2016 driven by its expanding footprint. We note that China PSAs have been substantially higher than the rest of IMAX’s circuit for quite some time now, and we are not particularly concerned about the reduction in PSA as it normalizes with the rest of the world. We think that IMAX’s current backlog in China is its last big push into the region, and expect the company to focus on other regions going forward. In particular, we expect IMAX to focus on its European expansion now that AMC is entering the region via its recent acquisition of Odeon & UCI, and as evidenced by the recently announced 5-theater deal with Les Cinémas Gaumont Pathé. • SVOD content costs continue to rise . On Thursday of last week Amazon reported Q3:16 gross margins that missed expectations, driven in part by what we estimate to be ≈$300 million in video content spending that had not been included in estimates. While Netflix’s Q3:16 results featured higher than expected subscriber additions, the company reported negative free cash flow of $(506) million and guided to a similar figure for Q4, highlighting the trend of escalating content costs which we fully anticipate to continue for the foreseeable future. As the SVOD space has become increasingly crowded, and providers spend incrementally to produce and license more and more exclusive content, we expect heightened video content spending to continue for both Amazon and Netflix, while the spending gap should narrow between the two, approximately reflecting the quality of content as well. Amazon Prime membership (which includes unlimited Prime Video and Prime Music) is only $99 annually (compared to $119 for Netflix), and we think that long time Netflix customers could be persuaded to switch this Holiday season as Amazon markets their video service more aggressively, and as Netflix completes its price increases on its remaining grandfathered subscribers, potentially bringing greater consumer attention to the price comparison and alternative content available. See Figures 5 – 9 on pages 6 – 10 for a summary of Netflix and Amazon’s respective programming). Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors Movies Movies and Entertainment should consider this report as only a single factor in making their investment decision. Please see page 16 of this report for analyst certification and important disclosure information . Premium ticket comparisons look difficult in Q4 and Q1. In Figure 1 below, we compare the top ten films in each quarter to the prior year’s quarter, denoting which was or will be available in IMAX or IMAX 3D. We anticipate another difficult comparison in both Q4:16 and Q1:17 for premium films. Figure 1: Top Ten Films by Quarter, Last Four Quarters vs. Estimates for Upcoming Four Quarters Q4 2015A Q4 2016E Rank Title Gross in Qtr Total Gross Opening Rank Title Est Gross Opening 1 Star Wars: The Force Awakens $654 $936 12/18/15 1 Rogue One: A Star Wars Story $298 12/16/16 2 The Hunger Games: MockingJay Part 2 $270 $282 11/20/15 2 Fantastic Beasts and Where To Find Them $229 11/18/16 3 The Martian $225 $228 10/2/15 3 Doctor Strange $220 11/4/16 4 Spectre (James Bond 24) $197 $200 11/6/15 4 Moana $173 11/23/16 5 The Peanuts Movie $128 $130 11/6/15 5 Sing $123 12/21/16 6 Hotel Transylvania* $122 $170 9/25/15 6 Passengers $103 12/21/16 7 The Good Dinosaur $110 $122 11/25/15 7 Arrival $82 11/11/16 8 Creed $99 $110 11/25/15 8 Trolls $79 11/4/16 9 Goosebumps $79 $80 10/16/15 9 Office Christmas Party $72 12/9/16 10 Bridge of Spies $70 $72 10/16/15 10 Tyler Perry's Boo! A Madea Halloween $72 10/21/16 ` Top Ten Total $1,954 Top Ten Total $1,452 (26%) IMAX Total (within top 10) $1,121 IMAX Total (within top 10) $747 (33%) Q1 2016A Q1 2017E Rank Title Gross in Qtr Total Gross Opening Rank Title Est Gross Opening 1 Deadpool $351 $362 2/12/16 1 Beauty and the Beast $211 3/17/17 2 Star Wars: The Force Awakens* $282 $936 12/18/15 2 The LEGO Batman Movie $174 2/10/17 3 Zootopia $256 $329 3/4/16 3 Logan $146 3/3/17 4 Batman v Superman: Dawn of Justice $209 $328 3/25/16 4 Kong: Skull Island $131 3/10/17 5 The Revenant* $181 $184 12/25/15 5 Rogue One: A Star Wars Story* $128 12/16/16 6 Kung Fu Panda 3 $140 $142 1/29/16 6 Fifty Shades Darker $123 2/10/17 7 Ride Along 2 $91 $91 1/15/16 7 The Dark Tower $94 2/17/17 8 Daddy's Home* $86 $150 12/25/15 8 Power Rangers $75 3/24/17 9 10 Cloverfield Lane $59 $71 3/11/16 9 Ghost in the Shell $73 3/31/17 10 London Has Fallen $57 $62 3/4/16 10 King Arthur: Legend of the Sword $68 3/24/17 Top Ten Total $1,712 Top Ten Total $1,222 (29%) IMAX Total (within top 10) $982 IMAX Total (within top 10) $862 (12%) Q2 2016A Q2 2017E Rank Title Gross in Qtr Total Gross Opening Rank Title Est Gross Opening 1 Captain America: Civil War $405 $407 5/6/16 1 Guardians of the Galaxy Vol. 2 $318 5/5/17 2 The Jungle Book $359 $362 4/15/16 2 Fast 8 $277 4/14/17 3 Finding Dory $330 $471 6/17/16 3 Wonder Woman $217 6/2/17 4 X-Men: Apocalypse $153 $155 5/27/16 4 Pirates of the Caribbean: Dead Men Tell No Tales $200 5/26/17 5 Batman v Superman: Dawn of Justice* $121 $330 3/25/16 5 Transformers: The Last Knight $197 6/23/17 6 Angry Birds $105 $107 5/20/16 6 Cars 3 $156 6/16/17 7 The ConJuring 2 $91 $102 6/10/16 7 Kingsman: The Golden Circle $148 6/16/17 8 Zootopia* $85 $341 3/4/16 8 The Mummy $126 6/9/17 9 Central Intelligence $79 $126 6/17/16 9 Life $89 5/24/17 10 Teenage Mutant NinJa Turtles: Out of the Shadows $78 $81 6/3/16 10 Baywatch $69 5/19/17 Top Ten Total $1,805 Top Ten Total $1,796 (0%) IMAX Total (within top 10) $1,445 IMAX Total (within top 10) $1,638 13% Q3 2016A Q3 2017E Rank Title Gross in Qtr Total Gross Opening Rank Title Est Gross Opening 1 The Secret Life of Pets $364 $366 7/8/16 1 Spider-Man: Homecoming $210 7/7/17 2 Suicide Squad $319 $324 8/5/16 2 War for the Planet of the Apes $156 7/14/17 3 Jason Bourne $161 $162 7/29/16 3 Dunkirk $136 7/21/17 4 Star Trek Beyond $158 $159 7/22/16 4 Alien: Covenant $126 8/4/17 5 Finding Dory* $154 $154 6/17/16 5 JumanJi $120 7/28/17 6 Ghostbusters $127 $128 7/15/16 6 It $70 9/8/17 7 The Legend of Tarzan $127 $127 7/1/16 7 EmoJimovie: Express Yourself $64 8/11/17 8 Sully $114 $122 9/9/16 8 Bad Dads $63 7/14/17 9 Bad Moms $112 $113 7/29/16 9 The LEGO NinJago Movie $59 9/22/17 10 Sausage Party $97 $98 8/12/16 10 American Made aka Mena $55 9/29/17 Top Ten Total $1,742 Top Ten Total $1,060 (39%) IMAX Total (within top 10) $1,371 IMAX Total (within top 10) $808 (41%) * Indicates additional box office revenue earned in another quarter Color-code indicates IMAX title Color-code indicates IMAX 3D title Source: Boxofficemojo.com, HSX.com, Wedbush Securities, Inc.