Ann Parker – Director of Corporate Communications and IR
Scott Petersen – Chairman, President and CEO
Gary Ritondaro – SVP and CFO
Alex Lieblong – Key Colony Fund
Marcus Graham [ph] – Whitehill Capital [ph]
LodgeNet Interactive Corporation (OTC:LNET) Q4 2008 Earnings Call Transcript February 18, 2009 5:30 PM ET
Good afternoon, my name is Tania and I will be your conference operator today. At this time, I would like to welcome everyone to the LodgeNet fourth quarter 2008 earnings conference 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 would now turn the call over to our host, Ms. Ann Parker, Director of Investor Relations for LodgeNet. Ma’am, you may begin your conference.
Thank you, operator. Good day everyone. I’d like to thank all of you for taking the time today to listen to our fourth quarter 2008 conference call. You should have received copies of our earnings release. Although we understand that there was a delay in issuing it on the wire. If you still need a copy, we will send one. Just contact me, Ann Parker 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 fourth quarter 2008 earnings and will then welcome your questions and your comments.
This call is being web cast live over the internet through our company website at www.lodgenet.com. We also have posted slides on our website, which correspond with today’s comments and 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.
Thank you, Ann, and good afternoon everyone. I certainly must say the world has changed since the last time we held our third-quarter conference call in last October, and given the deteriorating economic conditions since that time, we did move early and, I believe, very decisively to reduce our operating costs and capital investment levels to right-size our operations to the evolving economic conditions. And that involved among other things, reducing our employee base by about 20%, freezing compensation levels, eliminating the company’s 401(k) match, suspending the annual bonus program, and then cutting a wide variety of other expenses. And I think our fourth quarter results show that those proactive management actions are offsetting the impact of this challenging economic environment.
As part of the plan, we reduced our operating expenses by 23% versus the fourth quarter of 2007 and 14% over the third quarter of this past year. And the capital investment levels were down 41% versus one year ago and about 25% versus the prior quarter, the third quarter of 2008.
And even though the fourth-quarter revenue was off by about 8.5%, we generated substantially greater cash flow from our operations during the quarter because of our rightsizing actions. Cash from operations was up over 60% from one year ago and 25%, 26% over the third quarter. And adjusted free cash flow was up about $12.5 million versus a year ago and almost $9 million versus just the previous quarter, the third quarter of 2008.
As part of our plan, we also dramatically increased the amount of cash and cash flow we allocated to reducing our debt. On our third-quarter call, I indicated that we are targeting about $9 million reduction during the fourth quarter, but given the results of our proactive management plan, we were able to drop that by almost $22 million during the fourth quarter alone, and in the year with $588.5 million of debt outstanding, and on a net debt basis that came in right about $578 million.
Before discussing our ongoing plans related to managing through this economic environment, I like to turn the call over to Gary Ritondaro, our CFO, at this point in time to give a little more color on the quarter and the results in 2008. Gary.
Thank you, and thank you for joining us today. I will be discussing more of the slides that we have posted, and I will begin with slide number three, which shows the annual revenue that was generated of almost $535 million, up about 10%. You will notice that we continue to show nice increases in revenue from our strategic growth initiatives, and during the year they made up about 32% of our revenue. It is coming from these growth initiatives.
Each of our key businesses showed increases year-over-year, with especially our Hotel Services and the category we call other, which combines healthcare and THN at almost 30% increases year-over-year.
Going to slide number 4, generating a lot of cash flow, you can see that we generated $138 million of adjusted operating cash flow, which is up 5.4% over the previous year, and adjusted free cash flow, which again we define as cash from operations less cash used for capital expenditures, increased almost – increased to 35%, an 88% increase year-over-year.
And, of course, as Scott mentioned then on slide number 5, you will see that we utilized a lot of that cash flow to repay our debt. Up until the second quarter of 2008, we basically were focused on the integration of the On Command acquisition. We used an amount of that cash flow going to pay severance and other integration expenses. Since that point in time, since the second quarter of 2008, we used that excess cash flow to pay down debt, and as you can see on the chart we paid $14 million in Q2, $6 million in Q3, and then as Scott mentioned $22 million by the end of Q4. When you look at the $588.5 million compared to where we were at the end of ‘07, we paid down $36 million of debt compared year-over-year.
Going to slide number 6 and talking some of the metrics for the quarter, you'll see that guest entertainment revenue per room was $13.75, down 18.5% versus the first quarter of 2007. Occupancy for the quarter declined about 8.2%. So the balance of the 18.5 is coming from those – what we refer to as a cautious consumer watching how they spend their dollars even though they are in the room.
Looking at the rest of that slide, however, you will see that revenue from Hotel Services and from System Sales and Related Services increased over double digits from a year ago, and these product lines, which again are part of our strategic growth initiatives, as I mentioned back on slide number 3, offset about 38% of the decline that we saw in the Guest Entertainment.
The increase in the Hotel Services is the result of more properties converting to high-definition cable programming than we had in previous quarters. The next full slide shows you the gross margin comparison, and again despite lower revenue the margin for Guest Entertainment business actually increased by 230 basis points. The majority of this increase is coming from lower commissions paid to hotels during the period compared to last year. As we have talked many times, we have a pay for performance as revenue declined as a percentage of commission of commission that we play to a given hotel has also declined.
You will note that the gross margin score of the Hotel Services increased substantially, and again this is due to converting properties to high-definition TV programming. Now we are able to charge certain properties for that service, where before when they were – we were delivering analogue TV programming, there was not the ability to have that revenue stream. So, we continue to see nice improvement in net margins for the Hotel Services.
The overall margin was down slightly and that is due to the change in products that we delivered this quarter versus a year ago. On slide number 8, you will see the benefit of the proactive management that we were talking about, as we continue to decrease our operating expenses. You will notice that we have had 23% decline quarter – Q4 of this year versus Q4 of ‘07. As Scott mentioned, we recognized early the need to address the impact of our business and the changing economic outlook. And we instituted and initiated a reduction in headcount as well as implemented other actions such as a freeze on all wages, the elimination of the 401(k) match, the elimination of the 2008 bonus program, and that carries forward into 2009 as well.
We have reduced our operating expense by 23% compared with the fourth quarter of ’07 and down 14% compared to the third quarter of ‘08. And it is not only reducing the amount of operating expense but on slide number 10 you will note, can see that we have reduced the allocation of cash, if you will, to capital investment. We have installed almost 30,000 rooms during the quarter, compared to about 32,000 rooms during the fourth quarter but the amount of cash used was about 40% less.
Certainly, we continue to reduce the cost of installing our systems. The other interesting point is about 90% of our installations during the fourth quarter were high-definition systems. When you look at slide number 10, again you can see the dramatic decline in the high-definition capital per room. We continue to reduce our costs through engineering efforts, the reduction of component costs, and also from higher capital contribution from hotels.
The cost to install a new digital HD was down to $375, down 25% versus the fourth quarter of 2007, and the same applies on the converted HD rooms at $275, down about 17%. The fact is that we continue to reduce the cost per room, the investment per room. We are installing just about as many rooms as before but with total lesser dollars.
On slide number 11, somewhat of a busy slide. There is a lot of information on this slide, but I think the key point here, the net income for the year was a $48 million loss versus on a pro forma basis $77 million loss. When you back out many of these one-time events, you will notice that we were down to $20 million of loss versus $30 million in ‘07 about a 33% improvement.
During the quarter, we did take a charge, a non-cash charge, of $12.4 million related to the write-down of goodwill and certain other intangibles as well as the write-down of an investment in a high-speed Internet provider, kind of that mark-to-market concept that kind of everybody is talking about.
As part of our debt reduction initiative, we acquired through our wholly-owned subsidiary $2.8 million of our debt at 50% of par, which resulted in that book gain of $1.4 million you see on the slide.
So backing out as I mentioned all of the one-time events, we had a 33% improvement in adjusted net income year-over-year. On the next slide, you will see the adjusted free cash flow, again significant improvements here in the adjusted cash flow from 22 to 27 and also a significant reduction in that investing capital that we used. In Q4 of ‘07 that was $18.6 million down to $11 million in Q4 of 2008, and we will talk a little bit about that on the next slide, but when you look at the net amount then, the adjusted free cash flow of $3.7 million increased to $16.2 million quarter-over-quarter.
On slide number 13, it is a slide that we always show the investors as to how we have been utilizing our capital. It provides a greater visibility to both the fourth quarter and for the full year. For 2008, we generated almost $100 million of pre-investment cash flow, $27 million of that cash was generated in the fourth quarter. And you can also see on that slide that we used $4.8 million to invest in our current room base as well as traditional assets giving us a $21.6 million of pre-expansion cash flow, and for the full year almost $58 million or the equivalent of $2.58 per share.
We continue to invest in new rooms. We installed about 15,000 new rooms during the quarter using $5.4 million. We spent about $23 million for the full year of ‘08, and again you see the adjusted free cash flow of $16.2 million for the quarter, and almost $35 million adjusted free cash flow for the full year, again $1.56 on a per-share basis.
Next slide is the covenant analysis, if you look at the combination of our debt repayment and the generation of $137 million of adjusted operating cash flow for bank covenant purposes, you can see that we had a leverage ratio of 4.30 versus the covenant of 4.50. One note that the difference in the bank adjusted operating cash flow versus our reported operating cash flow is due to severance payments, which are accounted for in the bank adjusted operating cash flow that we eliminated, and now report adjusted operating cash flow.
So with that I will turn the call back over to Scott.
Thank you Gary. Before going to your questions, I would like to make a few additional comments. First of all, I personally believe the fourth quarter results were very impressive, especially given the current economic environment. The team here moved early and decisively. We made very meaningful cuts to cost and capital. They are sustainable for the foreseeable period of time, and will certainly improve our operating results during the foreseeable future.
And we did this while maintaining good relations not only with our employees but also with our customers. We have had good communication and give-and-take during this period of time. And, I think, all of these efforts place us in a stronger position as the economic environment ultimately starts to stabilize in the near future and eventually improves sometime in the distance.
And secondly, I would like to also give you some – also insights into our operating plans for 2009 with some specific points of guidance for the first and second quarters. So you can make your own judgments on how you see our organization progressing.
If you go to slide 15, you will find our principal goals and strategies for this year. Simply stated at the top, we will continue to proactively, and I would also say conservatively, manage the company through this economic downturn to maintain compliance with our debt covenants and loan agreements, but also with strategies that we believe will drive our shareholder value over the long term. That involves – the first principal activity is rightsizing our operations to this evolving economic environments, and we are doing that by tightly managing our operating expenses and then targeting the capital, to reduce the amount of capital that we are allocating to investment into the business to our highest return opportunities.
And then secondly, it is really driving a strategic and diversified revenue growth, and this growth is focused on opportunities within our space that are not related to the purchase of entertainment by a guest in the hotel room nor is it also impacted by the occupancy rates the hotels experience.
Within the hospitality space, you can see that we are looking to drive revenue from Hotel Services. That is a really fixed recurring fees paid by hotels to us, primarily for TV programming and broadband Internet access services. But also the sale of systems to our hotels for accessing the Internet along with high-definition TV reception equipment and the installation related to that type of equipment. And even though we have proposals in the market that we would sell our interactive television systems to hotels, where they put up the capital to receive the benefits of having the interactive communication system within the hotel room versus the traditional method where we put up that capital.
With regard to the Hotel Networks, you know, that is involved in maximizing the revenues in this very tough ad environment and even a greater focus on minimizing our operating costs of that business during this period of time. And for Healthcare, our clear focus will be on installing the 15 contracts that we ended the fourth quarter in our backlog. And those 15 by themselves would represent over a 50% increase in our installed hospital-base. Of course, we are also focused on expanding and selling more systems including the maintenance agreements and the recurring revenues that they bring along with adding and selling new or additional applications to our existing customers.
So, the next couple of sides build on the information that Gary presented with respect to the fourth quarter, and I think it shows substantial progress that we have made and the levels we believe we can maintain or modify based on the circumstances.
If you go to slide 16, I believe it reflects the methodical process that we have already implemented in reducing our operating costs over the past four quarters, and as you can see we have in the first and second quarter of this year, we are indicating we are on track to operate at a $22 million to $23 million level per quarter until circumstances warrant a change either up or down. And this level, I think it is interesting, represents an operating structure of the cost about 30% less than what existed immediately after we bought On Command and merged the two organizations about – coming up about 2 years ago.
So, from my perspective the acquisition is clearly paying dividends for us especially in this down environment and with respect to operating costs.
One slide 17 that also reflects the similar methodical process or progress that has been made and reduce the amount of our cash flow that we are allocating to our capital investment programs. The graph clearly shows that we began reducing capital allocations as substantial economic weakness first appeared last summer, and I guess I want to note that we have always talked about that we had the ability to vary the level of capital investment depending upon circumstances. And I think this graph clearly shows that ability and our willingness to make changes given the changing circumstances, especially in the environment.
And the graph also indicates that during the first and second quarters, we are intending to invest only about $5 million to $6 million each quarter with about 80% of that capital going to revenue producing hotel installations, and we also view that this level is sustainable until circumstances warrant a change.
And I would also note that our – we have been in contact with all of our major customers since early – end of October, early November talking about these types of changes, and I would say that we have good working understandings with them that they understand this is where our investment levels need to be and, of course, we are working with them on their specific priorities.
On slide 18, it is a new chart that we’ve produced and I think it shows another area of substantial progress that we made on, and this is particularly since we purchased On Command in April of 2007. As you can see on the left hand side, prior to the acquisition, hotels were covering about 5% to 8% of the capital costs involved in an average installation, and you can see since that time their level of participation has increased substantially to over 20% at this point in time, as hotels are now purchasing more of equipment. I guess, I had particularly seen more – probably related to the high-definition television reception equipment from us. And then that allows us to focus our capital on the higher returning DoD [ph] investments at the properties. And we certainly expect this trend to continue for the foreseeable future.
If I take you to slide 19, this chart or graph represents the progress we are making on selling more services and systems and solutions to our hotel customers. That specific strategy was one of the principal reasons we purchased On Command and StayOnline in early 2007, and it has been gaining moment since that time.
As you can see, the fourth quarter of 2008 was up about 10% in revenue that we generated over the first quarter of last year, and the slide also shows that we expect this strategy to continue to gain momentum in 2009, as we saw more television programming and Internet services along with the sale of related systems and solutions to hotels and hospitals.
On slide 20, Gary was talking about the allocation of capital that we made in 2008 versus 2007. This is giving you a forward-looking view of how we intend to allocate capital this year. You can see the left-hand side of the graph for the entire year last year. We generated roughly about $100 million of cash from operations on an adjusted basis, which excludes about $9 million to $10 million of cash we used during last year for integration restructuring and reorganization purposes.
During last year, we allocated almost 70% of that cash to our investing programs and around 30% to paying down our debt. On the right hand side, you will see our 2009 plan. Now, we expect that some – the cash from operations will generally be comparable to those in 2008 and the significant aspect here is that during 2009, we expect to allocate and use about 70% to 80% of our internally generated cash to pay down debt in order to maintain compliance with our leveraged covenants, with the balance 20% to 30% to invest back into our business.
So, that is a – once again reflects the abilities for us to use that capital allocation as a very meaningful tool in managing our business especially during this period of time. So, if you take all of this information from the previous quarter five slides and apply to the first quarter of 2009, I would like to tell kind of how we see the quarter coming out.
So I will take you to slide 21, you will find our guidance for revenue through adjusted operating cash flow for the first quarter, the revenue guidance, and in fact this entire guidance, assumes that which you'll see in the bottom of the page that Guest Entertainment revenue will be off somewhere at 17.5% to 22.5% off of the first quarter of 2008. Those levels are relatively consistent with what we experienced and reported today for the fourth quarter of last year, and also what we have seen so far this year in the first quarter.
I would tell you also that a couple of positives that you should at least put into your mind as you think about this is Easter this year falls in the month of April, in the second quarter, whereas it fell towards the end of March last year, and Easter does tend to disrupt business travel, which is not necessarily good for our business. So, I do view that as a slight positive.
And also reports that are coming out from some of the agents, the companies that track hotel occupancies and hotel room rates, you're starting to see that the average daily rate is falling. In other words, what hotels are charging their guests and we view that as a positive for us, because we believe kind of on an informal basis that less a guest pays at the front desk or the better the bargain they get at the front desk, the more likely they might spend something on other services on property like buy movies from us. And, I think, we have had some experience with that in the past.
The guidance also assumes continued revenue growth from our strategic initiatives as I talked about on slide 19 and also the reduced operating cost structures that I explained on slide 16. Now, we did put the results from the first quarter of 2008 on the left-hand side so you can see how that changes quarter-over-quarter. So, we are anticipating revenue somewhere in the range of $126 million to $131 million and an adjusted operating cash flow in the range of $30.5 million to $34.5 million.
One thing that I do want to point out is that on the upper end of the range the reductions of our operating costs actually cover the entire shortfall in the gross profit that would be produced at those levels. So, I think the very real example of how our lower cost of operations right now is providing significant buffering of the economic environment, and on the lower end, of course, we have about $4 million reduction, all with margins in the range equal to – roughly equal to or slightly higher from last year.
And then if you go to slide 22, you'll find our cash flow and our debt repayment guidance for the first quarter of this year. With our limited investment capital program for the quarter and by applying up to – somewhere between $6 million and $9 million of cash from the balance sheet, we see paying down debt about $23 million to $25 million during the first quarter. Then you will also a line-item entitled benefit from debt repurchase on this schedule, and under our current bank credit facility, we have the ability to use up to $25 million of our cash to make various investments. And given that authority, one of our wholly-owned subsidiaries has been purchasing our bank debt in the market at significant discounts to its face value. Under GAAP, when we consolidated that purchase debt into our financial statements that debt is then deemed extinguished, which reduces the amount of the outstanding debt that shows up on our balance sheet, and is used for purposes of our bank covenant test.
And the difference between the cash purchase price and its face value is more reflecting there on the line we titled benefit from the debt repurchase. As was reflected in our earnings release today, we instituted that program in December, and as of the end of the year we had bought about $2.9 million of debt for roughly $1.5 million. And so for this quarter, we purchased an incremental $15 million of face value debt for around $9 million of cash. So, the $7.5 million of benefit that is reflected on this schedule reflects the benefits of those purchases during this quarter plus a small incremental benefit that we anticipate to gain during the balance of the quarter.
So, overall you can see that by quarter’s end we believe we will have debt reduced from the $588 million level to the $556 million to $558 million level, which will produce a leverage ratio that keeps us in compliance with our bank requirements.
So, with that I would like to ask the operator to explain the procedure for asking questions. Operator?
(Operator instructions) And we have a question from the line of Marla Backer.
Very impressive, the way you were able to manage your cash flow. So, having said that, you have obviously done a very aggressive job on the operating expense line. In the past, I know you have tested pricing to see what kind of an impact it would have on buys. You have also played a little bit with the subscription model for some sports packages. Have you done any internal strategizing about ways to possibly boost the top line from the guest, not from the Hotel Services side, but from the guest side in terms of promotional activity, whether it is subscription model that you had offered on the sports packages in the past?
Marla, we have a team that is – despite the tough economic environment and the slower occupancy we have a team that its task at maximizing whatever revenues we can generate from guest entertainment, and you know, part of that is looking at pricing, part of it is looking at promotions and placements, how it presents itself on screen. And we also are looking at new ways that we can create some more kind of retail strategies around that. I would tell you that on the price elasticity, we have tested up-and-down, pricing up and pricing down, and even in this economic environment we are finding that especially on the theatrical side, we probably somewhat – we can gain more revenue from the guest by pricing the average ticket up slightly.
So, we are continuing to modify based on that. One of the other things we are doing, we have been looking at some and will be introducing a new promotional channel and that is already in rollout stage on the former On Command technology platform that historically had not had a – that type of marketing involved and that has been after testing implemented and being rolled out right now. And we are also looking at some modifications to our high-definition television locations also introducing the turn-on channels that – which promote more and more of our content versus kind of more of the ambience kind of activity.
So, we are taking very active views of that. We are not giving up the ship whatsoever from that. And as the year goes on, we are also looking perhaps at some abilities to use alternate payment methods, whether it is a pin access code, credit card entries, those types of things that would help to boost revenues whatever the environment might be.
Now, and forgive me if you have answered this question when you were addressing the slides on the covenants, because I'm just a part of the call. The covenants, I think, you said given your debt pay down now you are at, at the end of the first quarter you are at 4.3 times versus the covenant of 4.5 times. So, well within that covenant. Do the covenants get tighter over the course of ’09?
At the end of the first quarter, there is a scheduled step down to 4.25 times and then at the end of September. So right now we are in a series, where every six months the covenant steps down by 25 basis points. So our guidance – we are at 4 – we did a nice progression from the third to the fourth quarter, and what we are guiding for the first quarter is also another continued nice progression that keeps us below the 4.25 at the end of the first quarter, and as we allocate more and more of the 70% to 80% of our cash from operations to reducing debt this year, we would see a path to compliance as it drops to 4.0 times at the end of the third quarter.
Two final questions, are you at all confirmed – are you hearing anything within the industry about potential solvency issues of any of the smaller hotels that you deal with, I mean, I am not talking about any of the larger chains, but some of the smaller hotels?
Well, certainly Marla, this is Gary. In this kind of environment, some of the smaller properties and the one-off properties we see. But again we have been managing the receivable with those properties very, very closely. So, while there may be some it would be minimal impact to our results.
And then Marla you should also know that when properties, we have actually had very limited exposure to bankruptcies in the past but our – the contract is set up where our receipts are held in trust by the hotels for our benefit, and of course, for them to have television services post bankruptcy. In the bankruptcy estate, every room needs to have television services. So we – it tends that we are just like utilities the power and the light and the water where we do get preferential treatment there, and have had a very good experience in getting our monies.
And then finally, you talked a little bit before about the hotels can move out the cost of capital investment, and I think in the past you have referred to the hotel outlays, as the HIM [ph] model the hotel investment model. Are you seeing a pull back by the hotels on that model now as they also try to conserve capital in this environment?
I think, historically we have, I guess, there are two factors, one was the Las Vegas Sands organization was probably our foster child for a major transaction a couple of years ago where they – we did – sold the system to them and we are operating and maintaining the system for them and doing a rev-share for their Las Vegas property and Macao, China property. But historically outside of that most of our activity had been in smaller properties that did not really qualify. They were revenues under $15 per room, that just was not the prime area for us, and we have made those offers to hotels and had a fair amount of properties that took those opportunities, but not a high amount of volume, I would say. In this economic environment, rather than coming to a customer relations issue where the demand, I would say, certainly exceeds the supply for our – the amount of capital that we want to fund into the industry. We have decided that we will open it up to purchases by hotels. For example, if there is a new property that is turning and new construction property that doesn’t need a profile that they want to have it or need to have it for a brand standard, then it is available.
So, it is a way of accommodating the need without using our capital. I will tell you, we would hope that it will be – this will be an offering that will gain momentum over time. Hotels clearly are in a space right now, where capital is of a concern from their perspective. So that it does kind of give us a breather, I think, this year because hotels are putting off their capital purchases of flat panel televisions et cetera, but I think we are planting the seeds perhaps for a business model over the long term, where hotels will think more that it is – that is just natural that they would invest in these interactive television systems in their rooms just like they would invest in other technologies on property or other just guest amenity purchases that they might make on to drive guest experience. So, I would not expect a lot. We are expecting a modest up-tick this year from a hotel investment model perspective, but I think over time I think it might develop into something very meaningful for us.
The next question comes from the line of Alex Lieblong from Key Colony Fund.
Alex Lieblong – Key Colony Fund
Hi, I am Alex.
Alex Lieblong – Key Colony Fund
Great operations during a very tough time. I am just wondering on the Hollywood movies, are you able to work out a better deal of revenue sharing with them yet? I mean is there anything on the table that can come from that?
Well, we do each studio separately. So, in the post On Command time frame, so it is coming up on two years, we have been in some cases we – On Command had agreements that expired. Actually, they tended to be shorter-term agreements. In the LodgeNet side, we had generally done output agreements. We have been merging those relationships with those contracts over the past couple of years, and as Gary pointed out our cost of goods for movies has dropped period over period. Most of that has been related to reductions in commissions we pay to properties, but we always talked pay for performance as movie. As revenues went up, we got a slightly higher percentage – it is working nicely on the way down, but some of that also has been a modest benefit from a greater volume of purchases from our studio partners. And so – that is an element of the benefits we have seen.
Alex Lieblong – Key Colony Fund
And refresh my memory, what happens on the convents there if you go to 4% and on – I mean, not 4% but a 4 multiple in September?
Alex, it continues to drop until September of 2010, where it stops, the drop stops at 3.5.
Alex Lieblong – Key Colony Fund
And your next question comes from the line of Marcus Graham [ph] from Whitehill Capital [ph].
Marcus Graham – Whitehill Capital
Hello, this is Marcus Graham from Whitehill Capital. Just a few questions, can you breakout movie revenue and gross margin per room for the quarter?
That is on our – and if you go to the –
Marcus Graham – Whitehill Capital
You have Guest Entertainment.
We have Guest Entertainment. In the body of the release there is some metrics. Let me find them here quickly. For the full year, the average movie revenue per room was $15.20 compared to $16.62 for last year. And then for the three months ended fourth quarter, let me just, movie revenue was $12.84 for the fourth quarter versus $15.60 in the prior year quarter, and we don’t take it down to gross profit.
Marcus Graham – Whitehill Capital
Okay, and then can you speak to, I guess, sequentially there was about an 18% decline in Guest Entertainment revenue per room, but you saw 300 basis points in margin, improvement in margin. Can you just speak to what was driving that on a sequential basis?
On a sequential basis again the revenue per room being down about 18%, about 9 percentage points came from lower occupancy and the balance just came from fewer buys from those people that are in the room. And then the increase in the gross margin again comes from us paying lower commissions to hotels, and as Scott just mentioned, slightly less royalties to the studios for the products.
Marcus Graham – Whitehill Capital
Okay, and just what sort of context should we be thinking for a trough movie gross margin per room, is 60% roughly the threshold, or what should we be thinking?
Yes, actually we had come up from that about 60% level. We are almost up to about 62%, 62.5%. And if you go back over the last three quarters that number has actually inched up slightly. Again the pay for performance on the hotel side, and with the volume of revenue that we have for the studio movies, we get a little bit lower royalty. So, I would say it is right in that range of between 60% to 63%.
Marcus Graham – Whitehill Capital
Okay, and then my final question, I assume that when you are speaking of your subsidiary purchasing debt, you are talking about repurchasing the term loans. Is that – when that is repurchased is that retired or does remain voting?
No, it does not retire.
Marcus Graham – Whitehill Capital
So, the company can then book those – that debt.
Marcus Graham – Whitehill Capital
Okay, thank you. That is all I had.
Thank you very much.
And there are no further questions at this time, sir.
We would like to thank 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 www.lodgenet.com. The slides used during this web cast will also be archived on our website for your reference, and if you have any difficulty downloading those slides, we would be happy to send them on request. Thanks again everyone, and have a good day.
This concludes today’s conference call. You may now disconnect.
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