RealD Licensing Revenue Up, But Profit Takes Another Hit on Glasses Saturation

In its fiscal Q1 2012 earnings webcast, RealD said licensing revenue for the quarter ended June 24 hit an all-time high, rising 39 percent to $35.7 million from Q1 2011. Most of the increase was from international markets where licensing revenue jumped by more than 100 percent, said CEO Michael Lewis. Lewis said Q1 results did not include revenue from “Transformers” or “Harry Potter and the Deathly Hallows Part 2” which released after that date. The two movies have generated more than $1.7 billion in global box-office sales -- “the majority from 3D screens” -- and combined with the other 10 3D movies showing in theaters during the current quarter, are expected to deliver the largest revenue quarter in the company’s history, Lewis said.

Lewis acknowledged “industry concerns” about 3D trends in the U.S. Addressing what he perceived to be the top two concerns about 3D on Wall Street -- studio commitment to making 3D films and how RealD’s financial model performs domestically as a percentage of the total box office results -- he said 3D performance is consistent with recent levels. Profits studios receive for releasing 3D versions of films are “compelling,” especially in international markets, he said. “Harry Potter” is expected to achieve $1 billion in global box office sales, with half coming from 3D, he said. “Even conservative assumptions” would suggest that 3D ticket premiums for “Harry Potter” will generate $100 million in incremental revenue for studios and theaters, he said.

Growth in the installed base of 3D TVs will help “future-proof” studios’ investment in 3D films by providing “a large downstream revenue base in the home,” Lewis said. Studios remain “very committed to 3D,” he said, citing a quote from DreamWorks CEO Jeffrey Katzenberg last week where he referred to the “exceptional ROI of 3D films.” Lewis also cited a comment from director Ridley Scott at Comic-Con 2011 last week, where “he said he'd never work without 3D again.” Scott’s first 3D movie, “Prometheus,” is due out in June 2012. “The top directors in the world are using the technology,” Lewis said, “and directors drive the film business."

To date, RealD’s revenue has come almost exclusively from the cinema business, but Lewis said consumer electronics “could be even larger than our cinema business.” He noted the agreement the company signed in May with Samsung on LCD panels that use active-shutter 3D technology viewable through inexpensive passive RealD glasses (CED May 17 p6) as the first step. The original announcement included 23-, 27-inch PCs and a 55-inch TV, and Samsung has added 15-inch and 17-inch laptop panels since that are due in the market early next year, he said.

Lewis is “encouraged” by ongoing developments in the 3D TV market as the feature is appearing in more models. He expects 3D to eventually become a standard feature for most TVs. RealD will benefit from the per-unit licensing model, as 3D becomes a standard feature in TVs “and potentially other devices,” he said.

Focusing on the past two months, Lewis said the movie industry has generated between 40 and 60 percent of domestic box office receipts from 3D screens. The financials for the June quarter indicate that “our business model delivers strong financial results even at these levels,” he said. “Harry Potter” received 43 percent of domestic box office receipts from 3D screens during the opening weekend, but many industry observers looked solely at the percentage of screens and concluded that the film’s 3D results globally were disappointing, he said. “In reality, ‘Harry Potter’ delivered the second highest domestic 3D box office results for any opening weekend ever,” he said. “It’s the dollars that really matter,” he said. International markets comprise 60 percent of global box office numbers, Lewis said, “so our financial results are much more heavily weighted to international performance."

RealD’s deal with AMC for 1,000 more 3D screens came on the heels of a pact with Cinemark for 1,500 conversions to 3D, Lewis said. That should ease constraints imposed by available 3D screens as more 3D movies are released. Limited screen availability held back 3D viewings of movies like “Captain America” this summer, he said. “The screen crunch experienced during the summer and holiday seasons further demonstrates the limitation of focusing only on 3D percentages,” he said.

Analysts have cited dark images of 3D movies as a factor in consumers’ rebuff of the technology. Lewis said RealD is working with studios and theaters to improve the viewing experience and that 1,500 RealD-equipped theaters displayed a “significantly brighter image” when showing an enhanced version of “Transformers 3” boasting twice the brightness. RealD is in active discussions with studios about releasing digital prints with better brightness for future films, he said.

In response to a question about whether economic pressures and the high price of 3D tickets might lead studios and distributors to pressure RealD to lower its 3D royalty rates in the future, Lewis indicated that could happen. “Clearly, the consumer is probably paying a lot of attention to ticket prices right now,” he said. He acknowledged that exhibitors and studios are looking at 3D premiums and “perhaps in time maybe the models get adjusted.” But RealD gets “paid by the exhibitors and our fees are locked,” he said. Regardless of what happens on pricing, “we're still going to get our royalties,” he said.

RealD’s licensing revenue was up for the quarter, but its net revenue was down to $23.8 million from $38.8 million, it said. The decline was partially attributable to an increasing number of international consumers returning to the theater with RealD eyewear purchased at a previous viewing, it said. RealD shares closed $2.88 lower Friday to $15.54.

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RealD used its earnings report to publish the domestic 3D theatrical release schedule for the fiscal year. The company said its fiscal Q2 licensing receipts will deliver the highest revenue quarter to date. “The Smurfs” opened Friday, and coming 3D attractions for August are “Glee Live,” “Final Destination 5,” “Spy Kids 4,” “Conan the Barbarian” and “Fright Night.” September 3D releases in the U.S. are “Shark Night 3D,” “Lion King 3D” and Dolphin Tale 3D.” One 3D movie, “Three Musketeers,” delivers in October, and seven premiere in November: “Puss in Boots,” “A Very Harold & Kumar 3D Christmas,” “Immortals,” “Happy Feet 2,” “Arthur Christmas,” “Piranha 3D” and “Hugo Cabret.” December’s 3D palette includes “The Darkest Hour” and “The Adventures of Tintin: The Secret Life of the Unicorn.” For RealD’s fiscal Q4 2012, January through March, seven 3D titles are slated for release: “Underworld 4: Awakening,” “Journey 2: The Mysterious Island,” “Star Wars: Episode 1” (re-release), “Ghost Rider: Spirit of Vengeance,” “Dr. Seuss’ The Lorax,” “Hansel & Gretel: Witch Hunters” and “John Carter.”