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Executives

Ann Parker – Director of Corporate Communications and IR

Scott Petersen – Chairman, President and CEO

Gary Ritondaro – CFO, SVP of Finance, Information and Administration

Analysts

Jim Boyle – CL King

Ali Mogharabi – B. Riley & Company

Alex Lieblong – Key Colony

Jeff Bronchick – RCB

Tom Kerr – Reed Conner

Mike Grandall – Key Colony

LodgeNet Interactive Corporation (OTC:LNET) Q3 2008 Earnings Call Transcript October 28, 2008 5:00 PM ET

Operator

This is Theresa and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session.

(Operator instructions) I will now turn the call over to Ms. Ann Parker, Director of Investor Relations for LodgeNet. Ma’am, you may begin.

Ann Parker

Thank you, operator. Good day everyone. I’d like to thank all of you for taking the time today to listen to our third quarter 2008 conference call. You should have received copies of our earnings release. If not please call me at 605-988-1000 and we’ll make sure you do get a copy.

Our speakers for today’s call will be Scott Petersen, President and CEO of LodgeNet and Gary Ritondaro our Senior Vice President and CFO. Scott and Gary will review our third quarter 2008 earnings and will then welcome your questions and your comments.

This call is being webcast live over the internet through our company website at www.lodgenet.com and we also have the slides posted on our website which correspond with today’s comments. They can be found under the Investor section.

Before we get started I’d like to remind you that some topics to be discussed today that do not relate to historical performance may include or constitute forward-looking statements within the meaning of the Federal Securities Laws and are subject to risks, uncertainties and other factors that could cause actual results, performance or achievements of the company to be materially different from those expressed or implied by such forward-looking statements. Certain of the risk factors which could affect the company are set forth in the company’s 10-K and other filings. With that said, I will now turn the call over to Mr. Scott Petersen.

Scott Petersen

Thank you Ann and good afternoon everyone.

Well widely macroeconomic environment certainly was challenging during the quarter and especially for our guest entertainment services. Our strategic acquisitions and I believe our proactive management plan continue to offset the impact of the environment. As a result, we drove increased revenues related to our new revenues initiatives, we are harvesting operating synergies, we are driving capital investment efficiencies within our traditional business, we are generating more free cash flow, and we are balancing the expansion of our business with the deleveraging of our balance sheet.

On slide two of the slide that we posted on our website, highlights the quarterly achievements. First of all, please note that our diversified revenues and our initiatives covered about 40% of the decline in guest entertainment revenues so it is making a meaningful impact. Hotel services and system sales revenues were up by 12% over last year and they buffered a large part of the – about 11% declined in guest entertainment revenues. We continue to make great progress on the operating expense front. System operations and SG&A were down about 13-1/2% or about $4.3 million over last year and that greatly attributable to impart of the full integration of the On Command, the On Command acquisition into our business at this point, but also the proper measures we have been taking to cut our operating cost given the current economic environment.

And given that economic environment, we cut capital investments during this quarter by about 40% over last year. During this quarter, we invested about $14.7 million into our business and that compares around $26.8 million last year. So we have the ability to manage capital and we certainly are doing that.

As a result, free cash flow; and just to be clear free cash flow is straight from the cash flow statement, it is cash from operations minus cash used in debt activities equaled $6.2 million this year and that compared to just a $1.5 million last year. And we applied that free cash flow to reducing our long term debts at the end of the quarter on September 30. Net long term debt was right about $595.5 million so we are making nice progress in that area. So before we discuss some forward plans related to reduce our operating capital investment plans as we think about 2009, I’m going to turn the call over to Gary.

Gary Ritondaro

Thank you, Scott, and again welcome everybody.

I’d be starting with slide number three which talked about our diversifying revenue. Revenue for the quarter as you can see on the slide was about $135 million, a decrease of about 5% quarter-over-quarter. Our growth initiatives generated 22% more revenue this quarter than they did during the third quarter of 2007. And we certainly continue to diversify our revenue base as you can see it from the slide of hotel services are up over 15% and our other which does include system sales, advertising, healthcare and other; generated more than 5% of growth. For this quarter, approximately 31% of our total revenue came from non-guest entertainment services.

Switching over to slide number four, you can see our total revenue per room. Total revenue on a per room basis for the quarter was $24.30 down about 5.6% from $25.73 last year. Our guest entertainment revenue per room was $16.85 versus $19.06 for the third quarter of the last year. We believe that the high prices of gasoline and other commodities are effecting the quarter as well as the turmoil in all of the financial markets and ultimately a very low consumer confidence level creating a very cautious consumer during the last summer travel months.

As you can see on the slide, movies was down about 10.3%, part of that coming from occupancy which was down 3.5 or 350 basis points if you will for the quarter versus the rooms we serve.

Movie titles during the quarter were pretty much empowered with what we have during the third quarter of last year. Our top three titles this year were What Happens in Vegas, Indiana Jones and Iron Man. And last year the top three titles were Wild Hogs, Knocked Up, and 300. I might also comment that number four last year was Spiderman. So, it was a comparable line up of movies this year versus what we saw last year. And even though revenue decreased for movies, as you’ll see later, that the gross margins for movies actually increased.

Other guest entertainment on the slide was down $0.42 versus third quarter of last year and that goes to usage of games and TV internet. Revenue from other guest entertainment is increasing nicely about 40% of the decline in guest entertainment revenue per room was offset by the increase in revenue per room generated by hotel services and system sales especially when you look at hotel services, you will see an increase of 15% period over period. TV programming revenue was up very nicely, 16% and that is from the gross of our deployment of HD free-to-guest and the conversion of Maui Marriott service properties from analog free-to-guest to HD free-to-guest. Broadband shows an increase for about 4%. It is an increase of rater per room plus an increase in billable services revenue for the quarter. System sales, advertising, and other increased about 3%. Showing that increases where from our professional services, solutions sales, and healthcare offset somewhat by the weakness in advertising market.

Going to slide number five, we will see that our total gross margins for the quarter was 45.3% down from 46.8%. All of this of course is related to the revenue mix and that is where the growth of our new revenue sources is slightly lower margins than our core business. Despite the decrease in revenue per guest entertainment that I mentioned on the previous slide, you will notice here that gross margin for guest entertainment was on par with last year right around that 59.8%.

Movie gross margin actually increased slightly from 61.7% to 62.3% last year. This is a result of lower hotel commissions and lower content royalty payments. And again despite the fact that revenue was down, we have increased the margin on that business.

Other guest entertainment gross margin was 26.3% versus about 37% last year. This is due to lower revenue from games and TV internet services; both of which have a fixed component of their cost.

Hotel services here you will notice that margins increased very nicely, 420 basis points to 8.2%. TV programming with the bulk of that increasing 570 basis points from 2.6% to 8.3% and as we talked about per revenue it’s a result of moving more of our products the free-to-guest, the TV programming to HD free-to-guest, and the conversion to the full service Marriot which is driving the improve profitability. Broadband gross margin was below last year to several one-time cost adjustments that we reported this quarter.

The margin for system sales, advertising and other increased 70 basis points on higher revenue, most of that again coming from our professional solutions which has a very nice margin contribution.

Slide number six talks about our operating expenses. As you will see at the headline, it was down 13.5% and the reductions are being driven by the On Command integration and the fact that we are again taking proactive plans to reduce other operating cause given the current economic situation. You will notice the major headline there is that operating expenses talks about 80% of the gross profit reduction. The biggest reduction came from SG&A which was down about 23%, a savings of $3.7 million quarter-over-quarter and when you annualize that number, we are on that $17 million range of cost reduction compared to where we were at the third quarter of last year. System operation just a couple of more data points was $2.67 per room versus $2.80 last year and on SG&A, as a percent of revenue, was 9.2% this year versus 11.3% last year. So, again, we are seeing very nice decreases in operating expenses both from the integration of On Command and/or all of our reducing operating expenses on a very proactive basis.

Slide number seven, notice our net loss was reduced by 45% quarter-over-quarter. For the quarter, we generated $61.3 million of gross profit versus $66.7 million last year, but our operating expenses were down by $11.4 million, more than offsetting the reduction in gross profit. For the quarter, we realized an operating income of $4.6 million versus an operating loss last year of $1.4 million or a $6 million swing just in that one quarter. You will notice also in this chart that interest expense was reduced about 10%, $1.2 million. Obviously, we continue to reduce our level of debt and we are also taking advantage of lower interest rates. The other that you see there is related to the consolidation or as they call as the amalgamation of our two Canadian subsidiaries into one subsidiary and of the one-time cash benefit in 2007 as a result of that combination. Given all of the above, we have reduced the net loss by 45% which is over $5 million and versus – the net loss for the quarter which is $6.3 million.

Moving to slide number 8, here, you can see a side-by-side comparison of the two quarters, Q3 of ‘08 versus Q3 of ‘07. You will notice again, as Scott mentioned, the free cash flow went from $1.5 million in Q3 of ‘07 to $6.2 million in Q3 of ‘08. A good portion of that contribution came from the reduction of our investing from the $27 million level the last year to the almost $15 million this year. So, a $12.1 million less than debt from this year versus last year, so a very nice reduction as we manage our cash flow and manage our investment plan.

The next slide, on slide number nine, also relates to how we are investing. Here, you can see again the graphical display of our capital required per room for both a new HD room, and a room that we are converting from analog to HD. On the new HD room, you can see we have reduced our investment in Q3 from $441 million down to Q3 of this year of $400 million or a 9% reduction, and the same trend on the converted HD room from $331 million down to $299 million or a 10% period-over-period reduction. The reductions are coming from the cost of components are coming down. Our engineering staff continues to bring engineering system to take cost out. More capital contribution coming from the hotels especially on the HD free-to-guest system and somewhat of a change in the average number of rooms per property as we are really focused on converting and putting our systems in the more of the larger properties that again generates higher revenue per room.

Slide number 10 talks about our 2008 guidance. Certainly, given the general state of the lodging industry and coupled with the general economic outlook, we have updated our guidance. It is based on lower projected occupancy levels and changing guests buying patterns because of the recession. The update utilizes the same forecasting methodology that we have used in prior quarters. It was updated to refresh the year-to-date results in the impact of recent operating trend. We are guiding to a revenue range of $537 to $541 million, and at the midpoint of our updated guidance, we generate about $28 million of adjusted free cash flow.

On the next slide, number 11, you will see the bridge on how we get the adjusted free cash flow. You will see here that we provide, again, the same guidance in terms of methodology that we have used in the past analyzing the first nine months using the adjusted operating cash flow of $138 million that’s reflecting the year-to-date reduction in movie revenue of 6.5% as compared to 2007. The sensitivity analysis at the bottom of that chart shows a various level of movie revenue per room decline and what impact that has on revenue and adjusted operating cash flow. As you can see, our guidance reflects a range between down 6.5% to down 8% per movie over the course of the full year and this translates into a 10% to 15% range for the fourth quarter and that is the range that is consistent with what we have been seeing since June.

Going to slide number 12, this shows our adjusted free cash flow analysis, again, very similar to what you have seen in the past. On an adjusted basis, we are generating approximately $106 million of adjusted operating cash flow during the first nine months. After interest and the change in working capital, our pre-investment cash flow of $72 million And from that, we have spent a capital expenditure of $53.4 million and when you take originally for our forecast for 2008 as investing about $60 million for the first nine months. You can see on the chart, the corporate and minor extension add up to a total of about $20.4 million, our major upgrade of $15.5 and new room capital of $17.5 generating an adjusted free cash flow then of $18.7 million after all capital investment. And for the full year, we expect to generate $92.5 million of pre-investment cash flow. Again, going to the chart, you can see pre-expansion capital of $42 million, new room capital of $22.5 million which gets us down to an adjusted free cash flow of $28 million or $1.26 per share.

Going to slide number 13, analysis of our covenant, as of the end of September, we had outstanding debt of $610 million and $15 million of cash on the balance sheet for a net debt of $595.5 million. The adjusted operating cash flow on a trailing 12 months is at $139 million which capitulate into a leverage ratio an outstanding debt of 4.38 and on a net debt basis of 4.28 times versus a covenant of 4.5. As we noted earlier, we did pay back during the quarter a $6.6 million of our Term Loan B. So, using the updated guidance for 2008, and this is the midpoint of that guidance, you will see that we are looking at a leverage ratio at year end in that neighborhood of 4.39 with a net debt of 4.31. And again, that is against the covenant of 4.50.

With that, I will send the call back over to Scott for some additional comment.

Scott Petersen

Thank you, Gary.

At slide 14, I have noted some key factors we would like for you all to keep in mind. First of all, we are proactively managing our business in a changing environment or we are reducing our operating cost, we are managing our capital investment levels, we are driving on the CapEx per unit, so a lot of solid things are happening within the business. It is also good to note that our new revenue initials are making a positive impact and build those new revenue revenues are not dependent upon occupancy levels of hotels nor the purchase of some type of entertainment service from a guest. Of course, we are paying down a long term debt on a very methodical basis and deleveraging the company. In addition, I just want you also to know that we are preparing to manage our company assuming a prolonged downturn, and I guess I would say that we are hoping the future will look better than our planning assumptions but we clearly want to approach it on a basis that gives us the upside, world does comeback faster than we thought.

We are taking another hard look at all our operating expenses, looking at bright sides, the operations to the environments that we are seeing today. With that in mind, we are still in the planning stages but for 2009, our operating costs were targeted to be somewhere perhaps 8% to 12% below the 2008 level. So we see some significant operating savings coming starting Q4, they have been coming all the way along but certainly next year to buffer some of the short fall in the revenue that perhaps will happen in the economic environment. We will also reducing our capital investment levels. We have been doing I think a good job of driving those down on the last couple of quarters. As we have noted before, CapEx for the fourth quarter of this year will be – we are looking to take that down to $13 million to $14 million range versus the $15 million level in Q3 and about $20 million on Q1 and Q2. And our plan right now for Q1 of next year will be that we will be below the $10 million range for the quarter. So we have the flexibility is there to do that. We are taking steps of moving in that direction.

As we are planning for 2009, we are consulting with our largest customers and I believe they understand why we are reducing our capital investment levels. Many are in the same boat as we are given reductions in hotel occupancies and certainly the tightened credit markets today. Our focus is on working with them to identify their key needs, for example new property openings for a full service brands, high-definition television programming, working with them in the continued evolution of their franchisees and the brand standards of taking the upper end to the high-definition television program and also enhanced quality broadband internet services.

And with those last couple of comments, we are more than able and willing to meet the full market demand for solutions where we sell the systems to the hotels. And that primarily has been focused on the high-definition basic television systems and the broadband systems. But I would also note that we are making our high-definition VOD systems available for purchase. By properties, they are not willing to wait or in a position to wait until the cash flows are returned back to a more normal level. It is a model that was utilized by the Venetian Las Vegas and Venetian Macau last year and it can be a very attractive model from a hotel’s perspective and we expect others to follow that lead. Under this model, we make a modest profit on the sale of equipment, but then we do retain a portion of the revenue from entertainment purchases and also get reoccurring fees for technical service. So the net present value of the systems that we do sell is equal to or better than our traditional model. Of course, the key factor on the short term basis is of course that there is no capital investment on our part. We have even organized third party lease financing available for the hotels to make it as easy as possible if they wish to proceed in this area. So we view this a very attractive opportunity for us especially during this time of the economic downturn.

Like take a look at slide 15, the last slide, I just want to highlight and that is of course our key management goal in the near term is to manage our business and operations, to stay in full compliance with our debt covenants. We believe we have the tools to navigate through these environments as we have said; managing our operating cost, growing our strategic initiatives, or reducing our capital investment plans. And on this slide, we have also identified for illustrative purposes just to give you a better idea of some net debt targets for of course the year end and I will also like that layout of what we are thinking about for the first quarter of next year.

Of course on slide 13, Gary showed that our target for the end of this year was about net debt of about $587 million which is about a $9 million reduction from that that existed at the end of the third quarter. And for the end of the first quarter of 2009, we are targeting a range of around $570 million to $575 million of net debt which is about a $12 million to $17 million reduction from the levels that we see at the end of this year.

Now, the one thing – the key factor here is to illustrate how our business is generating very substantial and nice levels of free cash flow and presents the opportunity for us to get to these debt levels in a very business-like manner. So it really is a question of capital allocation. So if you could think about it on a courtly basis, our business generates about $23 million or $24 million of cash from operations per quarter. That is the GAAP definition, that is not EBITDA but have been technically it would be adjusted operating cash flow minus interest and any changes in working capital. And of course our job is to allocate sufficient amount of that cash flow to debt reduction to meet our targets.

So for the fourth quarter of course put that in perspective, we are looking to allocate roughly about $9 million of the $23 million to $24 million of cash flow or about 35% to 40% to debt reduction. And then for the next quarter would be offers to $17 million of the cash from operations and that would lean towards 70% of overall cash from operations to reducing debt to keep us in compliance with our debt covenants in this environment at the current type levels. And of course, these targets and amounts are subject to change and management based on changing circumstance but we thought it would be beneficial just to lay those thoughts out. And of course, the bottom line there is that given our planned operating reductions and our abilities to flex down in capital investment and of course also the growth in our strategic revenue initiatives, we believe we are in a position to remain in full compliance with our existing debt covenants.

So with that, operator I would like to turn it over to you and let everybody know how to ask questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line Jim Boyle with CL King.

Jim Boyle – CL King

Good evening. Gary quick housekeeping question just to refresh my memory, on the debt covenant, is it the net debt ratio or the higher ratio that is used?

Gary Ritondaro

It is the higher ratio but remember that we certainly have the opportunity to use any of that cash to pay down debt. That is why think it is important to show what it would be on a net debt basis.

Jim Boyle – CL King

Okay, makes sense. Scott, if LodgeNet’s trend worsen beyond even the most recent early October levels, how many or how much OpEx, CapEx, and levers do you have left to pull beyond this presentation slides?

Scott Petersen

Well Jim I was indicating for next year, we are seeing certainly OpEx which this year will be running in about in the $112 million to $115 million range. We think there is an 8% to 12% range right now that we are looking at and will be implementing given this current environment pending any turn around during this period of time. So that it would be significant, I mean, we are talking a significant reduction in OpEx almost comparable to what we had probably saw this sort for less, maybe slightly less.

From a CapEx perspective, I would say that we believe we can operate at the level that’s in the range even of $6 million per quarter that would – that is not optimal by any means but to get through these uncertain times. The traditional capital, the internal capital pieces here are being highly scrutinized or reduced. And then, the balance going to our customers most important issues especially when it comes to like opening of the major brands, full service hotels, etc. So at level of $6 million a quarter like $25 million would be something that we believe we could live with for some extended period of time if it needs to be.

Jim Boyle – CL King

Okay. And do you think will ‘09 revenue be negative versus ‘08?

Scott Petersen

If that is the great – if that quarters take a long, the question is that where is that all going to go? I don’t think we want to probably go out that far right now. I’m in a crystal ball if you know where the accounting is going to go in the second half of next year. I guess that is the great question where it goes. On the near term of course, we would certainly believe in our plan in the movie revenue will continue to be down quite substantially, I mean that’s the reality we – or that is the assumption that we are putting into our planning. Hopefully as the second half of the year comes along, it turns into flatter period-over-period result on the movie levels. And of course in our growth initiatives in the meantime are continuing to build and then actually supports and increase in revenue. So, it really depends on the length and the depth of the recession but – and I don’t think we want to stick our necks out at this point on trying to make that determination.

Jim Boyle – CL King

But when you say prolonged downturn that you’re planning on it, it sounds like you’re presuming a negative ‘09 given the recession stuff you can’t control.

Scott Petersen

When it comes to the movie side, we are assuming movie revenues will be down next year versus this year. That is true.

Jim Boyle – CL King

Okay. Final question, Scott. Do franchise cable operators’ MSOs ever approached you on a market or two and asked if they can buy some rooms in that city?

Scott Petersen

That has not been a situation up to this point, Jim. Yes. It hasn’t – no one has thought of it from that perspective up to this point but I wouldn’t rule it out. There has been a situation that could make sense, but up to this point, that has not been a situation that has arisen.

Jim Boyle – CL King

Because I would presume out of your roughly two million rooms, not all of them have to be core strategic operation if a prolonged downturn gets worse.

Scott Petersen

That would be true. I mean, I we have – with the acquisition of (inaudible) on a full integration when every major market, we have a very substantial concentration for hotel rooms and – so that would be something on a list that could certainly be considered as a way to reduce that.

Jim Boyle – CL King

Okay, thank you.

Operator

Our next question comes from Ali Mogharabi.

Ali Mogharabi B. Riley & Company

Hi guys. Actually, I don’t know if you touched on this but the Q on ‘09 net debt guidance or range that you’ve given, can you give us an idea on what cash balance it’s based on?

Gary Ritondaro

Currently, we have a – as I’ve said in my talk about a $15 million cash balance at the end of the quarter, we would look to reduce that balance at the end of any given quarter down to about $10 million and use that additional $5 million to pay down debt.

Ali MogharabiB. Riley & Company

I’ve got you. So basically $10 million? Okay.

Gary Ritondaro

Yes, $10 million.

Ali MogharabiB. Riley & Company

All right. And then regarding some of the other, I guess, types of revenues besides the movie revenues, can you provide some more color on ad revenues? Is that progressing? And how is that progressing?

Scott Petersen

Ali, in the press release, with most of the information that information that ties in with our online – which is system sales advertising or other, in the release in MD&A section, you will note that we did provide some internal information about advertising was down somewhat this year, third quarter versus third quarter a year ago. The ad market is definitely soft. The interesting factor there is we have two basic points. One is the satellite delivery of 10 channels. That is more of the traditional ad of a certain model. The other side is where we would put tunneled [ph] content to our file servers on premises and then creates some proprietary channels and actually that VOD applications in the third quarter helped to buffer some of the softness in the traditional ad model. The outlook there is soft, clearly it’s going to be soft in the fourth quarter and I would assume the first and that the entire ad industry right now is under – revenues are certainly below last year’s level.

Ali MogharabiB. Riley & Company

So basically, in addition to movie revenues very likely going down, we should also expect the ad revenues as you mentioned because of the different macroeconomic factors also go down, correct?

Scott Petersen

The only counter to that, Ali, I would say is this year was a rebuilding year for our team and we had the hotel networks. We brought on a new president of the company in February and did a lot of rebuilding of the sales team during the year upgrading the staff, the quality of the talent. So we tell you, this year, also, there were some of the down drafter [ph] can get attributable like think to a changing of the guards, so to speak. I think we’ve got a very talented team there, high energy. So I wouldn’t disagree with your basic premise. However, I think, certainly given the size of the revenues that we have had in the past that we’ve got an interesting opportunity to buffer the soft environment by just having a more engaged sales organization out there, really attacking the industry coming up the next couple of quarters than we did over the last couple of quarters. So that would be my only footnote to that.

Ali MogharabiB. Riley & Company

Thanks guys.

Scott Petersen

Thanks, Ali.

Operator

Our next question comes from Alex Lieblong with Key Colony.

Alex LieblongKey Colony

Hi guys. I’m just going to complement you on keeping the SG&A – the one thing you can’t control of.

Scott Petersen

Thanks, Alex. I appreciate the comment.

Operator

Our next question comes from Jeff Bronchick with RCB.

Jeff Bronchick – RCB

How are you guys?

Scott Petersen

Good Jeff.

Ann Parker

Fine, thanks.

Jeff Bronchick – RCB

Could you talk about exactly how you bring CapEx down to current levels? How would you go to customers with this level? What are they saying? And how do you allocate CapEx if you are going to spend – how do you peak and choose who gets it?

Scott Petersen

Well that is darn good question. And I will tell you it is enter to enter process. First of all, in the one slide, I guess in slide 12 that is in debt this time. If you compare that to the slide that we put out for the second quarter results at the end of July, you will see basically no reductions in the major renewal capital projection and also in the new. In the majors, there is a bigger reduction over prior taking and what the new has been. But both are fading and also some minor extensions and other corporate – not specifically this period but certainly is subject to significant reductions for next year. So the tools there of course in one hand is getting the capital cost per room down as much as possible and from the slide show has some nice progress there. We actually are introducing a new server into our systems now and the fourth quarter which will be taking off more CapEx. We have also instituted some programs this year already where hotels are taking responsibility for a greater portion of the overall capital of the systems especially relates to the high-definition equipment necessary for the basic TV programming. So you will see it on a per unit basis there is already a downward movement that we have seen and we would expect that to continue. Then it comes down to volume from that perspective.

And our contracts generally don’t have a specific installation time frame. It is an agreement that at some point that we will either install our system or upgrade our system. So from that perspective, we have a lot of flexibilities, however, coming back to the relationships with the hotel customers. We are in the market right now going to our hotel customers and we are not by ourselves in this economic environment so we are trying to communicate the situation that we are trying to be reasonable business people. We want to do business with them but until the world becomes a little more stable in knowing exactly were consumer be here as far as the feeling better about the world and buying more movies or coming back up. We just need as business people to be much more conservative. So we are staying in compliance with all of our debt obligations, loan agreements, etc.

And it clearly to the industry’s benefit to have us as a stable provider given the amount of business that we do with the industry and I would say we are having this conversations with our major customers and other significant customers. And overall, I’m pleased with their reactions. It is a very business-like discussion. And so that is part of – and finding of what their biggest needs are, how many new construction properties, other programs; and then try to – and that is the process we are going through right now is taking all these information and then making capital allocations that on the macro basis worked for us from a balance sheet perspective and the deleveraging perspective and also try to serve the biggest portion of the demands or the key needs of the hotel industry that we can.

And of course, to the other side of the coin, is that we are – in those cases where there is so much more demand then we have also – as said we are willing to step up and actually sell our systems which I think is a very interesting business model for us anyway. But this environment it is not to say no you can’t have anything, is to say yes but here would be a new approach for you. We can show that most hotels would be making an extra return in that invested capital.

So it is either of it is – we are trying to be good with the communications, working all the basics, and keep everything in balance. And so far I’m encouraged that the progress we are making and the responses that we are getting back and fully believe that we can execute on these reductions in debt targets that we have talked about today and hopefully as we move away from this shock of the September-October time frame that it starts to fade and the world starts to comeback somewhat but we are certainly not planning in that regard.

Jeff Bronchick – RCB

So essentially you are just telling clients, you’re proactively going to clients and saying it would be really great if we move this installation out a quarter or so to give us some breathing room?

Scott Petersen

Yes. And there are some cases where the contract is in and they were going to move the high-def. And some hotels right now of course is they are reassessing their 2009 capital plans, they are also some movements out on that. So it is not necessarily in conflict with maybe what they are thinking about doing themselves now that they thought they wouldn’t be doing. So some of it is moving together but it is saying listen, I think in the next quarter, let’s think the quarter thereafter and maybe the one after that.

Jeff Bronchick – RCB

Thank you.

Scott Petersen

Thanks.

Operator

Our next question comes from Tom Kerr with Reed Conner.

Tom Kerr – Reed Conner

Can you separate the healthcare revenue growth from that other segment to give us an idea of how well that segment is doing?

Scott Petersen

Yes, in fact, I think Tom in the press release there was some specific data in the quotes I believe. Hang on one second.

Operator

Our next question comes from Mike Grandall with Key Colony.

Mike Grandall – Key Colony

Can you guys remind us the version with Marriott and that upgrade and the lift you’re getting? How far you are through that and what is the timing and realize all that value?

Gary Ritondaro

Mike this is Gary, we are probably about 50% on the way through that. If you recall the Marriott full service properties will be converting over to HD by the end of ‘09. But again as Scott was talking about capital, we have also seen some of the hotels that were scheduled to do that in this coming quarter, the fourth quarter, pushing their acquisition of HD sets out another quarter or two but certainly with the announcement by Marriott that they want them all done by the end of 09 that when we would expect to be there as I said we are about 50% of the way at this point.

Mike Grandall – Key Colony

So, on a room count, how many rooms are left so far?

Gary Ritondaro

There is probably about 65,000 to 70,000 rooms left.

Mike Grandall – Key Colony

Okay, thank you.

Scott Petersen

I should just clarify that other question about the healthcare. In the third quarter, the healthcare group put about a $1.2 million of revenue which was about 20% greater than the third quarter of the prior year. We also have an interesting backlog of about I believe is six or seven in facilities under current installation that should be in, if not by the end of this year, would also be within the first quarter. So the group has – we had some good sales and our revenues are up year over year because of that.

Operator

(Operator instructions) We will pause for just a moment to compile the Q&A roster. And there are no further questions at this time.

Ann Parker

Thank you, operator, and thanks everyone for joining us today. Again, a reminder that replays of this call can be accessed over the next month via the Internet through our company website again that is www.lodgenet.com. The slides used during this webcast will also be archived on our web site for your reference.

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Source: LodgeNet Interactive Corporation Q3 2008 Earnings Call Transcript
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