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Crown Media Holdings (NASDAQ:CRWN)

Q4 2012 Earnings Call

February 22, 2013 11:00 am ET

Executives

Allison Bennett - Director of Corporate Communications and Media Relations - Crown Media Networks

William J. Abbott - Chief Executive Officer, President and Director

Andrew Rooke - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Charles L. Stanford - Executive Vice President of Legal & Business Affairs and General Counsel

Analysts

Michael V. Pace - JP Morgan Chase & Co, Research Division

Alan S. Gould - Evercore Partners Inc., Research Division

Peter Okin

Richard Lee

Salvatore Muoio - SM Investors, L.P.

Lawrence M. Stern - Stern Capital, LLC

Operator

Good morning, ladies and gentlemen, and welcome to the Crown Media Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder this conference call is being recorded.

Today's presentation includes forward-looking statements regarding the company and its performance. The forward-looking statements may concern, for example, expected financial position and operating results, its business strategy, its operating and financing plans and other matters. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in or implied by any forward-looking statements and should be considered in conjunction with the cautionary statements included in our press release, and our most recent reports filed with the Securities and Exchange Commission, including our most recently filed annual and quarterly reports.

Any forward-looking statements are made only as of the date of this conference call based on information known to date to the company's management. The company is not undertaking any obligation to update any forward-looking statements.

I would like to turn this call over to Allison Bennett. Go ahead, Allison.

Allison Bennett

Thank you. Good morning, everyone, and welcome to Crown Media's fourth quarter conference call. With me today are: Bill Abbott, President and Chief Executive Officer; and Andy Rooke, Executive Vice President and Chief Financial Officer. Bill and Andy will comment about the operating results and financial performance for the 3 months and ended -- and year ended December 31, 2012, and then we will open up the call for questions.

We want to emphasize that we will accept any reasonable questions during this Q&A period. But we reserve the right to terminate a caller and move on if we have already addressed their inquiries and the questioning becomes repetitive. I would like to remind everyone that our press release, which contains information on non-GAAP measures, was distributed this morning and is available through the Investor Relations section of our website at ir.crownmedia.net. In addition, our Form 10-K will be filed later today. Now I would like to turn the call over to Bill.

William J. Abbott

Thank you, Allison. Good morning, everyone, and thank you for joining us today. I am pleased to report positive results for the fourth quarter and full year ending December 31, 2012.

We experienced growth in advertising revenue and subscriber license fees, driving an 8% increase in total revenues as compared to 2011. This increase carried over to our bottom line with adjusted EBITDA increasing by 18% for the year. Throughout the year, we implemented a number of key strategic initiatives and both channels achieved significant milestones.

On the Hallmark Channel side, we unveiled a new brand identity and tagline, optimizing the channel's core values and positioning in the marketplace. We also developed the network's first-ever primetime scripted series and launched a new block of daytime lifestyle programming. Further reinforcing the value of the brand during the holidays, Hallmark Channel concluded the year with yet another successful "Countdown to Christmas" campaign. Meanwhile, Hallmark Movie Channel continues to be one of the fastest-growing networks in cable, recently achieving the key distribution benchmark of 50 million subscriber homes. Parallelling this growth, the network has seen exceptional gains on the ratings front and closed out the year with a banner fourth quarter.

Now I will review the quarterly, full year and 2011 year-to-date -- 2013 year-to-date operating highlights. In the area of content and ratings, for the third consecutive year, Hallmark Channel's "Countdown to Christmas" initiative, anchored by the 12 new movies of Christmas, delivered outstanding ratings, starting a record fourth quarter. Over the course of its run, from November 10 through December 30, Hallmark Channel ranked as the #1 cable network in weekend primetime among households and total viewers and #3 with our target demographic of women 25 to 54. With 1,100 hours of 24/7 holiday programming, "Countdown to Christmas" reached more than 65.4 million unduplicated viewers overall, while our 12 new original movies attracted more than 21.1 million unduplicated viewers.

Our scheduling strategy to premiere new movies every weekend continues to pay off, with the channel claiming the #1 rated ad-supported cable movie of the day for 7 consecutive Saturdays. What's more, 5 of the 12 new original premieres also ranked as the #1 program of the day across the cable television spectrum. And breaking yet another record, our 2012 seasonal programming brought Hallmark Channel its highest week of all time, November 26 through December 2. For the full fourth quarter, Hallmark Channel registered notable growth over the same period in 2011 among women 25 to 54, with an 11% increase in primetime and 16% in total day. The network also registered a 10% growth among household delivery for total day.

We are slowly seeing traction with our new daytime lifestyle block. In fourth quarter, Home & Family reached 9.6 million total viewers and 2.8 million women 25 to 54. In its 10:00 a.m. time slot, the show registered a quarterly 6% increase among women 25 to 54 over the time period average in the third quarter. Building the success of this block is and will continue to be a huge priority for us in 2013. Over the course of the full year, Hallmark Channel saw steady growth, increasing delivery among women 25 to 54 every quarter, with an increase of -- with an overall 10% increase in the demo for total day.

As for first quarter 2013 to date, the network is already seeing improvement over the same period in 2012, with delivery among women 25 to 54 up 9% in total day. The network's original movies continue to be a draw, with the first 3 movies of 2013 delivering strong ratings.

Kicking off the year, the January 12 premiere of The Nearlyweds was the #1 rated primetime ad-supported cable movie of the day, earning 1.2 household rating and reaching 2.1 million unduplicated viewers. One week later, the debut of The Sweeter Side of Life on January 19 delivered a 1.8 household rating and reached 3.1 million unduplicated viewers. And most recently, the February 9 premiere of Be My Valentine continued the momentum with another 1.8 household rating and an audience of more than 3 million unduplicated viewers.

Hallmark Movie Channel had an exceptionally strong culmination to the year, with fourth quarter marking its highest rated quarter to date. Fourth quarter also claimed the network's highest month, December; highest week, December 24 to December 30; and highest single day, December 30, of all-time. In addition, among all this size ad-supported cable networks, the channel was #1 in total day and primetime in households, as well as #1 in primetime in total viewers. The network registered a 38% increase in total day delivery among women 25 to 54 and 26% for households over fourth quarter of 2011. For the full year, Hallmark Movie Channel saw 47% increase among women 25 to 54 and 28% for households as compared to 2011.

This momentum has carried over into the first quarter, with Hallmark Movie Channel already besting its recent weekly and daily records with Sunday, January 6 becoming the network's highest day and December 31 through January 6 becoming its highest week. Hallmark Movie Channel's first movie of the year, Goodnight for Justice: Queen of Hearts, the third installment in the Goodnight series, starring Luke Perry, delivered a 1.0 household rating and ranked as the channel's second-highest rated original movie in network history.

On the distribution front, Hallmark Channel's universe estimate is 87.3 million Nielsen households for February 2013, an increase of 244,000 homes over January 2013. Our affiliate sales team completed a renewal with Time Warner Cable toward the end of fourth quarter and ahead of the contract expiration date. Since the execution of the document, Time Warner launched Hallmark Movie Channel to 500,000 subscribers, setting the stage for a successful long-term partnership.

We continue to expand carriage of Hallmark Channel HD, adding 75 new -- 75,000 new HD subscribers to the network in fourth quarter, including launches on Comcast, Time Warner and various NCTC members. Hallmark Channel HD is now available in 2,535 systems nationwide, as well as Dish's and DirecTV's platforms.

As I mentioned earlier, Hallmark Movie Channel is now in 50 million homes, registering an increase of 897,000 homes over the January 2013 number. This growth can be attributed to launches on a variety of systems, including Time Warner, Comcast, CenturyTel Broadband, MetroCast and Puerto Rico Cable. Since becoming Nielsen-measured in April of 2010 through February of 2013, Hallmark Movie Channel has added nearly 16 million new subscriber homes, representing the largest percentage increase of any other cable network in that period.

Advertising sales for the full year increased by 8% as compared to 2011. 2013 calendar year upfront negotiations are nearly completed for both Hallmark Channel and Hallmark Movie Channel, with total revenue up 15% versus 2012. In spite of the economy remaining unstable and advertisers exercising caution with their marketing budgets, Hallmark Channel has seen steady activity in the first quarter scatter marketplace. We are currently pacing above first quarter 2012 in volume, while CPMs show an increase of 24% over upfront. Incumbent clients' CPM increases remain in single-digits above upfront basis. Similar to Hallmark Channel, scatter volume for Hallmark Movie Channel is pacing above last year. And we have registered a 21% increase above upfront pricing.

Preparation is well underway, both internally and externally, for the 2013, '14 upfront, and we are optimistic that our sales strategies will allow us to monetize the gains being made on the programming and distribution sides of the business. We are confident that our rating successes in fourth quarter, the development of our lifestyle programming in daytime and the excitement surrounding our first original primetime scripted series will serve as positive leverage. And we look forward to reporting favorable results.

I would like to turn this over to Andy now to review the financial results.

Andrew Rooke

Thank you, Bill. We are pleased to report another year of record results, with revenues up 8% at $350 million and adjusted EBITDA up 18% at $138 million. For the fourth quarter, revenue increased 3% to $102 million from almost $100 million in the fourth quarter of 2011 due to the continued growth of Hallmark Movie Channel, with subscribers on that network up 9% and our key demographic audience of women 25 to 54, up 38%.

Advertising revenues on Hallmark Movie Channel for the quarter are up 23% from a year ago at almost $11 million due to a 21% increase in ratings among our key demo of women 25 to 54. And across both channels, advertising revenues increased 2% to $83 million from just under $82 million for the same period last year. For the full year, advertising revenues were up 8% at $271 million from $251 million achieved in 2011.

Subscriber fees grew 9% year-over-year as a result of rate increases. 2012 programming costs declined over $2 million or 2%, as a number of our licensing agreements expired and our revenue sharing agreement with Martha Stewart Living ended. Other cost of service increased $1.5 million or 12% to $13.5 million due to increasing residual costs on our original programming.

Selling, general and administrative expense increased 35% to almost $17 million for the fourth quarter of 2012 due to the increase in performance-based employee costs and increases in legal expense. After adjusting for a one-time banking fee of $2.5 million in March 2011, SG&A expense increased $7.5 million or 14% to $59 million for the year. Research, legal, and performance-based employee costs all showed greater-than-average increases. Marketing costs for the fourth quarter of 2012 of $8.5 million were up $2 million from the fourth quarter of 2011, as a result of increased investment to support our holiday programming schedule. For the full year, marketing expense was comparable to 2011.

Interest expense decreased $0.5 million for the fourth quarter of 2012 as compared to the same period of 2011. Interest on the note was $8 million in fourth quarter of 2012, similar to that in 2011. And interest expense on the term loan was $3 million during fourth quarter of 2012 as compared to almost $3.5 million during the same period in 2011. Overall interest expense increased $20 million for 2012 year-over-year due to our preferred stock having been redeemed from the proceeds of interest-bearing instruments and interest expense in the first 2 quarters of 2011 having been reported under troubled debt restructuring accounting. For the year ended December 31, 2012, interest on our term loan and notes was $12 million and $32 million, respectively.

The company recorded a net income tax benefit of $22.5 million compared to $234.5 million in 2011. And in total, the company has released over $290 million of valuation allowance over the last 2 years and most of its deferred tax assets are expected to be utilized in reducing tax liabilities in the coming years.

Growth in our revenues, together with a decrease in our programming costs, has resulted in increases in our adjusted EBITDA and operating margin for the year. In 2012, adjusted EBITDA rose 18% to almost $138 million and our operating margin increased from 36% to 39%. Despite this growth in adjusted EBITDA, we made significant interest payments under our debt instruments of $45.5 million in 2012 and consequently, our cash flow provided by operating activities decreased almost $11 million to almost $31 million for the year.

We also made payments to Hallmark Cards under a factor of tax sharing agreement of almost $22 million during 2012 as compared to $10.5 million in 2011. As of October 31, we became ineligible to be a member of Hallmark Cards' consolidated tax group for federal income tax purposes and do not anticipate in making -- do not anticipate making significant tax payments in the near future due to the availability of unutilized net operating losses.

During 2011, we used almost $36 million in financing activities, paying almost $14 million in dividends on preferred stock, and in July 2011, refinancing our operations, replacing existing preferred stock and notes due to Hallmark Cards with a new term loan and subordinated notes. During 2012, financing activities used $21 million of cash in payment of principal under our term loan. This reduction in debt, together with our increased earnings, has reduced our leverage ratio to 3.6x adjusted EBITDA as of December 31, 2012, compared to 4.4x at December 31, 2011. In March this year, we plan to make a combined excess cash flow and voluntary payment of $17.5 million on our debt.

We are pleased with our results for the fourth quarter and year ended December 31 and the progress we have made towards our capitalization goals. While the advertising marketplace and the upcoming upfront market will have a significant impact on our 2013 results, we look forward to continued growth in the year. We expect that our programming and marketing strategies in 2013 will help drive mid- to high single-digit growth in both revenue and adjusted EBITDA. This growth, together with the full year impact of a recent federal tax deconsolidation, is expected to result in significantly greater increases in operating cash flow.

With that, I'll turn it back to Bill.

William J. Abbott

Thank you, Andy. In many ways, 2012 was a landmark year for Crown Media. We rolled out some key strategies that were not only successful throughout the year, but have also established a strong foundation from which we will continue to advance our business in 2013 and well into the future.

At this point, I'll turn these proceedings over to the operator to assist us for the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Mike Pace of JPMorgan.

Michael V. Pace - JP Morgan Chase & Co, Research Division

A couple of questions for Bill and a couple for Andy. I'll probably just do them one at a time. Bill, we've kind of just hearing more and more about programming costs problems from the distributors. I mean, largely sports-related, but it's just that they're squeezing other channels as well. Can you guys discuss how those conversations have gone recently with some of your partners in terms of price increases in those contracts? Are they typically what they were in the past? And also I guess, as a follow-up to that, now that you've reached 50 million subs on Hallmark Channel, have you given any more thought to maybe try and get some money from the distributors there as well?

William J. Abbott

Sure. Like I said so, there's a fine balance between growing the overall universe and pushing on the price side. We feel we deliver really the best value equation in the cable business, which really allows us to grow the movie channel, continue to advance the Hallmark Channel's position in the distribution universe and landscape in a positive way. And certainly, we are focused on creating that value and driving our price where appropriate. But there's some question that what you cited is a reality that between retrans and sports rights is a very difficult environment. So at the end of the day, that value proposition that we offer is one that is significant and one that we think is worth significantly more and is a part of our conversation on a day-to-day basis. But no news to report in terms of a dramatic shift in terms of what that side of the business looks like moving forward.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Just the Hallmark Channel 50 million sub question.

William J. Abbott

Well, the Movie Channel just passed 50 million subs. We still have a lot of work to do, quite frankly, to get that network to the point that it is a bigger contributor on the advertising side to the bottom line. And at the end of the day, we think that the power of our brand, the power of our product and the strategy around the programming has a significantly higher payoff with better distribution on the advertising model than it would by trying to potentially drive a license fee, and thereby, potentially stunting the growth of the universe. So again, it's a fine line, and we are establishing value for it and we have our eyes open towards the day when we are getting revenue on the distribution side. But at the same time right now, the priority is definitely increasing the sub count.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Great. Maybe a couple for Andy. Andy, the fourth quarter, the SG&A line, I think, there was a couple million dollars of which you called performance-based employee costs. Were those cash? Or was there any stock there?

Andrew Rooke

It was all cash, Mike, payable just after the year end.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Okay. And then just to go back to the tax situation. After the October change, you mentioned you paid around $22 million in cash taxes in '12. Does that virtually go down to 0? I'm sure there's still some other small taxes that you're going to pay going forward, if you can give us an indication of what that might look like. And then under the new structure, at what point do you think that your NOLs may run out, where you do become a more significant taxpayer?

Andrew Rooke

Certainly. The taxes that we are -- we'll have to pay in the near future would be any amounts of AMTs that are due in local tax amounts. We do have the NOLs for federal tax purposes, which as you say, will wipe out most of that liability for the next few years. We have almost $700 million of NOLs to set against taxable income. And until that it is used, we do not anticipate a significant federal tax liability.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Okay, great. And then finally, you're down to mid-3x leverage. That was your original goal. You're here. I guess, how should we think about that going forward with your free cash flow? Should we expect you to continue to reduce leverage? Or any thoughts to return money to your shareholders?

Andrew Rooke

In the short term, we are still focused on paying down debt.

Operator

The next question is from Alan Gould of Evercore Partners.

Alan S. Gould - Evercore Partners Inc., Research Division

First, a couple of questions on the calendar upfront. What percent of your ad sales are represented by the calendar upfront typically? What kind of increases are you seeing in dollars and inventory sold versus the prior year?

William J. Abbott

It's a relatively small portion of our overall year end. But I'd say we'd be in the neighborhood of 4% to 5%. But at the end of the day, it's a very important market from just a trending point of view and from where advertisers are placing their dollars and where they're seeing the marketplace. So we felt very good about our ability to attract a pretty significant increase on the -- on both the pricing and the volume side in the calendar year upfront. And so as such, 4% to 5% would be, not only revenue but also inventory.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And where do you think the industry is trending? Because there's a lot of question, 4Q was a tough quarter for the industry ad-wise. Have advertisers bounced back after the fiscal cliff worries? Are they spending money again?

William J. Abbott

We've seen a healthy first quarter. It's still off a little bit from where we were in '11, I would say, but certainly better than it was in third and fourth of '12. I think that third and fourth of '12, in spite of the fact that there was a lot of political money out there and that tightened up a number of different marketplaces, local included, the hope that, that would migrate over to national and then the projection that, that would happen never really materialized. So we did suffer -- the whole business suffered through a very difficult third and fourth quarter. We have seen a fairly significant pickup. I think that inventory is tight in first quarter, which is always a good sign. And so pricing as a result of the last 6 weeks, I think, will reflect that, not only for us but across the landscape. Second quarter is still very much a wildcard, though.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And I know the industry always gives scatter over upfront. But do you have any idea what scatter over scatter was for 4Q, and possibly how it's trending for 1Q?

William J. Abbott

Yes. That's a great question. It probably was across the business down a little bit from 2011 levels. Again, '11 was a much stronger marketplace and '12 had a number of different factors, including the hurricane that really disrupted the market. I think that at the end of the day, first quarter, though, is above first quarter '12 levels in terms of both price and volume, approaching probably double-digits on the volume side.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And then the last thing, you have the digital distribution rights to your original programming? And if you do, have you had any sales to Netflix, Amazon, et cetera, on that programming?

William J. Abbott

I'm going to turn that over to Charlie Stanford. He's our General Counsel.

Charles L. Stanford

We have digital rights to almost all our original programming. And we have done small deals with Amazon and others but nothing substantial yet. But we are -- we do recognize that we've got to own the rights to be players in the digital marketplace. And so we're making every effort we can to acquire those rights on a going-forward basis.

Alan S. Gould - Evercore Partners Inc., Research Division

So you have the rights. You've done small deals, be looking to acquire more rights. Is that a fair summary?

Charles L. Stanford

That's right. And we actually have -- we have extensive rights to some of the past originals as well. We've been focusing on this for the past few years. So as with each deal, we acquire more rights and lengthen the period of our rights. And so we think we're in pretty good shape with our original programming can compete in the digital marketplace.

Operator

[Operator Instructions] The next question is from Peter Okin of Stifel.

Peter Okin

Congratulations, guys, on your record results. And usually, when you have record revenues and record earnings performance, it usually leads to some sort of shareholder value. And in this case and with your company, that just doesn't seem to be the case. Since your recap in 2010, when the stock was $3.5 and now it's at $2, you're down 42%. But you've had a record year this year. Could you talk to that and let me know as a shareholder in the minority, what the plan is to provide some sort of value to shareholders?

Andrew Rooke

We've been looking at that stock price on a shorter-term window than what you quoted there. And certainly, we're happy with the movement that it has shown recently. As you know, it has now moved above $2 for the first time in several months. So we are happy with the performance on the stock side.

Peter Okin

I mean, you're at $2.01, up $0.01 today. I mean, if you think $2 is a great thing, the recap was $3.5. And I just want to say, I went on Deloitte's website, which is one of the top 4 professional services firms. And Bill, I think you're on the board, right? And part of a board's responsibility on their website is to ensure that the corporate strategy will achieve value creation. Can you say that you're doing that or not?

Andrew Rooke

I think I just answered that, Peter, that the results...

Peter Okin

But you're not really creating any value. You're down 42% since the recap and the minority was diluted. And you guys, I'm asking fair questions and I would just like some response. You have no analyst coverage. There's no -- this is the problem, guys. There's no reason for people today to buy your stock in this company because there's no float, it's 90% owned by the family. So I'm asking legitimate questions, and this is the only venue to do this. So when you say, Andy, that you're happy that the stock's at $2, which is down 42% from the recap, I don't really agree with you. I mean, you're at $2 and -- let me just say something. I'm sure if we reconvened in a few hours or something or tomorrow or the next day, you'll be below $2. You know what I mean? You're not regularly above $2. You haven't been closed above $2 in many days, okay? And so I would disagree with you.

William J. Abbott

Well, Peter, as you know, we don't control the stock price. What we do control is the content we put on the air and the advertising that we generate and the distribution deals that we do, and subsequently, what that means for our bottom line. And we feel that through our development of original movies -- original primetime scripted series, daytime series that are right in an advertiser's wheelhouse and allow us to expand our brand digitally and do a lot of different things on the advertising side that creating an enormous amount of value there for our advertising clients. And then...

Peter Okin

But you're not creating value for shareholders, Bill. And you're on the board, and that's part of the board's responsibility. You know what, you say you're #1 in lots of categories. But you know what, this company is last in shareholder value. And that's part of a board's responsibility. And I would expect that you'll have some semblance of responsibility to that as your fellow board members do. How many of the board members are Hallmark...

Operator

The next question is from Richard Lee of the Post Advisory.

Richard Lee

So you gave us a lot of commentary on scatter and volume and CPMs. But when you just do the math, is there just a simple revenue pacing number you could give us? Is it basically trending -- for Q1, that is, is it basically trending in line with your guidance, mid- to high single-digits?

William J. Abbott

Yes. I think that, that's a fair assumption. Obviously, we're not giving any statements about where we think that the quarter will end, but we're confident that the strength of our ratings and everything we're doing on the programming side will, at the end of the day, pay off on the advertising side.

Andrew Rooke

Yes. We're seeing incremental increases in Q1 over Q1 last year, Richard.

Richard Lee

Okay. Great. And then my final question is on further distribution agreements. Are there any coming up in this year? Or you've typically disclosed what percentage of your subs are up for renewal. Could you provide us with that information?

Charles L. Stanford

We do not have any new negotiations this year. We have a couple of agreements that are subject to options that are exercisable by the distributor. We don't anticipate any problems with those agreements. We anticipate that they'll be extended.

Richard Lee

So how does the option differ from a renewal?

Charles L. Stanford

Well, the agreement's in place, and so there's no negotiation really to be had. The distributor has the option to extend or not to extend. And all our conversations with the distributors that are involved, needless to believe that they will be extended. We don't see any issues.

Richard Lee

I see. And could you give us that percentage of subscribers that are under that option?

Charles L. Stanford

I believe -- I can't give you a precise percentage. I think it's on the order of 20%.

Operator

The next question is from Salvatore Muoio of S. Muoio & Co.

Salvatore Muoio - SM Investors, L.P.

You may have touched on a few of these answers. You may have touched on a few of these before. I wanted to ask just really about, I guess, just advertising in the fourth quarter was a little difficult. And when I'm looking -- when you're looking at just breaking down the Hallmark Channel versus Movie Channel, a pretty tough environment, I guess. But the second half of the year, it looks like ad revenue at Hallmark Channel itself was sort of slightly negative for the second -- both in the third and fourth quarters. And I just wondered if you could talk a little more about that. And maybe just outside of the environment, things like perhaps -- I've sort of I wondered how much cannibalization there is between channels. When you look at the ratings for the Movie Channel and the Hallmark Channel, you add them up and together, you sort of get the ratings of what the Hallmark Channel sort of was before Movie Channel really got going a few years ago. Do you think there's any of that going on? Or is it just the environment? Or is it something to do with the audience, efficiency reserve changes and how that flows through the income statement? Or just if you could expand on that, I guess.

William J. Abbott

Sal, I think at the end of the day, we're always cognizant of potential cannibalization from one network to the other, which is why we've really embarked on a strategy that is heavy on original scripted primetime series on the Hallmark Channel side, as well as daytime lifestyle series with good, solid acquisitions that are cost-efficient. So we are cognizant of that, and we are actively looking to make the Movie Channel a significantly different service, yet within the Hallmark brand. I think at the end of the day -- sure, ratings year-to-year are up across both networks. So that's, I think, the best measure that we can look at.

Salvatore Muoio - SM Investors, L.P.

So that's year-to-year you're talking about, the ratings?

William J. Abbott

Well, year-to-year. And if look at the trend over the past 3 or 4 years, that rating -- those rating increases are consistent over that period of time from where we were 3 or 4 years ago. Demographically, we're significantly better than we were, if you're referring to 5 or 6 years ago, before the launch of the Movie Channel in earnest. From a demographic perspective, we are younger with higher income and better quality of demographics. So that may contribute to whatever decline you may be seeing over a 5- or 6-year period for the Hallmark Channel core business.

Salvatore Muoio - SM Investors, L.P.

So when you're talking advertisers, you're getting -- you're not getting a sense of their -- are they differentiating between the channels enough? Or do you feel like you're splitting -- do you feel like advertising that would've been at the Hallmark Channel is somewhat split off to the Movie Channel? Or how are you getting a sense of how much progress you're making in that direction, I guess? Obviously, you're not really differentiating...

William J. Abbott

Yes. No, I mean, it's never enough. But this year, we have 10 original movies on the Hallmark Movie Channel, which is for the first time ever outside of [indiscernible] commitment. So I think that it takes time. We are beginning to differentiate those 2 in a more significant way. The advertising space, we don't see really a cannibalization of one versus the other. I think that we see the same type of expenditure on the Hallmark Channel and then there's an additional Movie Channel commitment. So the appetite for our brand and the family-friendly content that we provide is very, very high. So at the end of the day, 1 plus 1 does equal 2 in advertising. It really is a question of making sure that those are 2 very, very different networks with experiences with different content that is compelling and attracts a different audience. And that is certainly our objective.

Salvatore Muoio - SM Investors, L.P.

So then you're really just attributing the sort of weakness in the main channel to the environment, more or less?

William J. Abbott

Yes. That's absolutely right.

Salvatore Muoio - SM Investors, L.P.

All right. Can I just ask a question about taxes? There's some change in the tax structure relative to the NOL. There's no -- I guess, you did not have the ability to -- that wasn't retroactive to the beginning of 2012 obviously or you would've had no cash taxes last year.

Andrew Rooke

That's correct. It became effective as of November 1.

Operator

[Operator Instructions] The next question is from Lawrence Stern of Stern Capital.

Lawrence M. Stern - Stern Capital, LLC

Can you update us on the AT&T U-verse situation? It's been 30 months since the 3 million subscribers disappeared. Can you give us a status update, please? And then I have a follow-up question.

William J. Abbott

Sure, a good question. We are always talking to AT&T. They are what we think about everyday. And we are in conversations with them around how we get both of our services back on the U-verse platform. In terms of any specific news to report, there isn't anything that we can at this point in time. At end of the day, though, we are -- we believe creating content that is extremely valuable and represented and positioned at a cost-efficient price. And we are confident that, that will win the day.

Lawrence M. Stern - Stern Capital, LLC

Okay. And as it relates to this performance-based cash bonus that was paid, if management believes that they're creating such significant value, please let all of the rest of the owners of the business know why management won't take it in stock instead of cash and pay down debt by a further $4 million and have management take a stake in the business. I'll take an answer from either one of you.

Andrew Rooke

Lawrence, we have left it up to the individual employees' base to make their own decision as to where to invest their different compensation.

Lawrence M. Stern - Stern Capital, LLC

That's a $4 million cash bonus. That could've reduced debt by a further $4 million if management believed that we were really on the path to creating such significant owner value. And it sort of boggles the mind that we're letting the cash slip out the door while you guys take salaries. I'm not talking about salaries here, Andrew. I'm talking about performance-based bonuses. Maybe you can just let us know how large of a stake management has of ownership in this business in terms of actual share ownership today.

Charles L. Stanford

Lawrence, to your point on the stock, I mean, the determination of how the -- of what the bonuses are payable in particularly a long-term incentive plan compensation payable and is determined by the compensation committee. They hear your comments, and I'm sure they'll take...

Lawrence M. Stern - Stern Capital, LLC

The board has not done a single constructive, shareholder-friendly action, to follow up on Peter's point, since the recapitalization has occurred in any way, shape and form.

Charles L. Stanford

Well, we would argue that the recapitalization was beneficial to all shareholders, including minority shareholders. We think we've done a lot with the company in terms of creating value. And I disagree with Peter. We've created a lot of value in the results that we've delivered in the past couple of years. That's what we can do with management. The decisions on whether to issue a dividend or to buy back stock are made by the board, but -- and not our decision. What we can control is the performance and results of the company. We focused on that, and we think we've done a pretty good job in the past couple of years.

Operator

[Operator Instructions] We have a follow-up from Salvatore Muoio of S. Muoio & Co.

Salvatore Muoio - SM Investors, L.P.

Well, I forgot to ask you just about the marketing expense in the fourth quarter. I know it's a big promotional season, et cetera, relative to all the movies. But I just wanted to get a sense for a magnitude from you, if you could. It seemed it was the biggest fourth quarter number, at least, the domestic channels ever. I mean, maybe it's you have more movies, 2 channels you're really promoting. Maybe just a little color on that. And the expenses, what's surprising about the quarter, the expenses were a lot higher than I kind of thought kind of across-the-board, other than program expense. And part of it, I guess, is the incentive bonuses and stuff. But excluding that, I'm just trying to get a sense for how you're thinking about, I guess, the expense side of the business, maybe even only a couple of [indiscernible] just by programming expenses, I guess, for the current year.

William J. Abbott

Sure. Sal, I'll let Andy handle part of this, but I'll talk about the strategy. At the end of the day, we think, and the results have proven, that we have a great opportunity to own this holiday season and to really own fourth quarter. And when you can deliver primetime ratings on the weekend that, without any qualifiers, are #1 in cable, again from November 10 through December 23, that is something worth investing in and that's something we're spending marketing dollars around. So we continue to look to that as being a big driver of our business and are confident in that in the future, which is the reason for the marketing spend. I'll let Andy talk about the specific expense side of...

Salvatore Muoio - SM Investors, L.P.

Bill, if you'll let me just follow up on that before you hand off?

William J. Abbott

Sure.

Salvatore Muoio - SM Investors, L.P.

Because you didn't -- you saw that advertising spend and you saw it come through in the ratings, but you didn't see it come through in the ad dollars. So is it -- do you look at it as sort of an investment to sort of own the season, so to speak, where you kind of see payoffs this year and next year, whatever, going forward? Or I mean, do you expect a more -- you know what I'm asking? You see it in the ratings...

William J. Abbott

I do. And I think that's a smart way. I mean, I think that we, at the end of the day, can't control that marketplace. And I think if we'd had any semblance of a marketplace, the results would be quite different. But moving forward, we have this platform with which to position to advertisers and to push CPMs and to drive our revenues. So yes, unfortunately, it didn't pay off necessarily in fourth quarter of '12, but we're very confident moving into the upfront that it'll begin to pay off moving forward.

Salvatore Muoio - SM Investors, L.P.

And when are you going to have comment on your upfront result numbers?

William J. Abbott

Hopefully, the -- it would be the -- not the next earnings call, but it would be the July -- second quarter, July.

Andrew Rooke

I'll take the second half of your question and would clarify on the increase in the SG&A, it was both as a result of performance-based employee costs and legal expenses related to the tax deconsolidation and other corporate matters. On the programming side, we spent about $162 million in 2012. We would expect to see that expense increase in line with revenue growth at a slightly slower rate.

Operator

I am showing no more questions in the queue and would like to close the conference at this time. Ladies and gentlemen, thank you for your participation in today's program. This does conclude the conference, and you may all disconnect. Everyone have a good day.

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