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Executives

Ann Parker – Director, IR

Scott Petersen - Chairman and Chief Executive Officer

Gary Ritondaro - Senior Vice President and Chief Financial Officer

Analysts

Frank McEverly – Craig Hallum

Jim Boyle – Gilfred Securities

David Kestenbaum – Morgan Joseph

LodgeNet Interactive Corporation (OTC:LNET) Q1 2010 Earnings Call April 22, 2010 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the LodgeNet’s first quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) As a reminder this conference call may be recorded.

I would now like to hand the conference over to your host, Director of Investor Relations Ms. Ann Parker. 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 first quarter 2010 conference call. You should have received copies of our earnings release. If not please call at 605-988-1000 and we'll make sure you do get a copy.

Our speakers for today's call will be Scott Petersen, Chairman and CEO of LodgeNet and Gary Ritondaro, our Senior Vice President and CFO. Also joining us is Frank Elsenbast, who will be assuming the role of LodgeNet’s CFO upon Gary’s retirement.

Scott and Gary will review our first quarter 2010 earnings and will then welcome your questions and your comments.

This call is being webcast live over the Internet through our company website www.lodgenet.com. We also have slides posted 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'll now turn the call over to Mr. Scott Petersen.

Scott Petersen

Thank you, Ann and good afternoon everyone. As usual, I would like to first give you some high level thoughts regarding the first quarter and then turn the call over to Gary Ritondaro for some comments on some of the details behind the numbers.

Simply stated, I think our first quarter results were solid and certainly within our guidance for the quarter. Our revenue diversification initiatives continued to move forward. We have produced greater revenue from both hotel and advertising services as well as our developing healthcare business during the quarter. We maintain the conservative operating cost structure and capital investment levels that we established in early 2009 in order to proactively manage the business through this challenging recession. And as a result, we generated $23.5 million of free cash flow during the quarter and for the first half of this year we continue to expect that we will generate somewhere between $33 million and $35 million in total.

In the quarter, we continued to strengthen our balance sheet as we have in the past. Our leverage ratio is now at 3.51 times on a net debt basis and that especially means that we are already at the lowest covenant level required under our credit facility. And lastly, during the quarter, I think we positioned our company to accelerate our transition to high definition systems during the second half of this year with the growth capital that we raised in mid march and I will talk a little bit more about that after Gary’s comments.

So, with that, Gary?

Gary Ritondaro

Thank you, Scott. Beginning on slide number three, you will see that our total revenues for the quarter was $118 million, which was again as Scott mentioned within our first quarter guidance range. Compared to last year’s first quarter, our revenues decreased about 7.8%. However, our revenue growth initiatives accounted for 41% of our revenue during the quarter and we saw a nice increases in revenue from hotel services, advertising services and healthcare.

Guest entertainment continues to be impacted by the economy and somewhat we believe by the bad weather that we experienced in January and February, which disrupted travel during this period. On the other hand, we experienced a very solid March. As a result, guest entertainment was lower this year compared to last by about 9.7%, a portion of the decrease is due to having fewer rooms in this quarter compared to last year. However the rooms, as that we have talked about, we removed from service are generally rooms that we do not meet our revenue criteria and therefore we would not be upgraded to HD systems using our capital.

On a positive note, we saw 3% to 4% improvement in occupancy rates period-to-period, again mainly concentrated in March because of the weather. Another factor impacting the comparison of revenue period-over-period was the $4 million contract within our professional services area with a major program provider during the first quarter of 2009. This service was performed to upgrade four HD channels for this customer and accounted for about 40% of our revenue decline, again period-over-period.

If you look on slide number four, we show our total revenue per room. Total revenue per room for the services we provide for the hospitality market including advertising services was $21.71, down about 4% compared to last year. Guest entertainment was impacted as I mentioned by the disruption in travel during the first part of the quarter and by the continuation of conservative consumer buying pattern.

On the positive side, those rooms that we have HD interactive systems continue to outperform the (base). HD rooms are generating about 50% more revenue per room for both guest entertainment and TV programming compared to those rooms that did not have interactive HD systems installed.

You will see there also that hotel services generated an increase of 9.5% in revenue on a per room basis as we continue to install as I mentioned the HD TV program systems. Generally, a larger percent of the hotels taking HD TV programming from us versus our general base, and (those that who) generally take larger packages of programming.

As I mentioned on the previous slide, the comparison for system sales and related services was impacted by large contracts that we had last year with that major provider. Excluding this from the comparison shows a comparable revenue quarter-over-quarter. And advertising had a nice improvement in revenue due to a new business model implemented in the second half of last year were (inaudible) revenue from channel access or leasing versus just from advertising.

On slide number five, you will see our gross margin comparison. And certainly, despite a still challenging economy, gross margins were stable to slightly improving for all of the businesses serving the hospitality sector. In my mind, this is an indicator of how we continue to monitor and control our cost and expenses and that's also an indication that we are maintaining a pricing structure for all of the product lines including guest entertainment.

Our total gross margin increased 40 basis points to 43.6% for the first quarter of 2010.

On slide number six, we show our operating expenses. On the face of the P&L, you will see a 7% increase in operating expense period-over-period. However in the first quarter of 2009, we initiated a one-time cost saving measure that reduced operating cost for the quarter by $1.1 million. When you factor that one-time benefit into the numbers, you see that we only had a 1.7% increase in operating expenses period-over-period. This increase is mainly due to an increase in employee health insurance expense and that the operating expense for the first quarter are in fact in line with our guidance and are comparable to the levels that we had in the fourth quarter of 2009. We continue to monitor our operating expenses very closely and expect them to be in the $22 million to $24 million range for the next several quarters.

On slide number seven, that shows our adjusted operating cash flow metrics, shows the trends on this for the last five quarters. Again, we were within our guidance for the first quarter of 2010. The one-time cost saving measures that impacted the comparison of operating expense also impacts the comparison of adjusted operating cash flow quarter-over-quarter.

I think the important takeaway on this slide is the relative stable and predictable level of adjusted operating cash flow that we generate and this is certainly a key factor in our ability to continue to maintain compliance with the leverage ratio covenant.

Slide number eight is our operating income slide. Again, we are showing you here the five quarter summary. Excluding the one-time cost improvement program, we had a 10% increase in operating income comparable to the first quarter of 2009. And looking at operating income over the past four quarters, you will see an even greater increase compared to any quarter last year driven in part by lower depreciation and amortization expense. Period-over-period, depreciation and amortization was down about $5 million, offsetting the entire decline that we saw in gross profit. The reduction in depreciation is due to over assets becoming fully depreciated and lower capital spending over the last couple of years.

Moving to slide number nine, on our net income loss, earnings per share. You will see again the actions we took in the first quarter of 2009 that impacted the net income, it also makes for a difficult comparison relative to the results of this quarter. And as we say around here, no good deed goes unpunished, so it does create a difficult comparison. But if you eliminate the $1.1 million benefit through the expense reduction program, we also had a one-time gain in the first quarter of 2009 as a result of our purchase at a discount of our debt. This was a $9.3 million, again one-time again. Excluding those two items, which totaled $10.4 million, we generated an actual 11% improvement with this profitability metric.

Two important factors to notice that we continue as I mentioned before to reduce our depreciation and as well as our interest expense down $1.2 million period-over-period as part of and as a result of our debt reduction. On a fully diluted share basis, we had a loss of $0.17, which includes the impact of the preferred dividend compared to a loss per share of $0.20 last year after adjusting for those one-time benefits in the first quarter of 2009.

On our cash flow statement, you will notice that we generated $23.6 million of free cash flow as Scott mentioned, and this was also capsulated after all capital expenditures, management of working capital, lower interest expense and capital spending were the major factors driving the increase. The generation of $23.6 million of free cash flow exceeded our first quarter guidance and we continue to expect that free cash flow for the six months of 2010 will be in that $33 million to $35 million range.

If you go to the next slide, you will see much more details what makes up the cash flow from – the free cash flow. As you can see, we had $28.1 million, $29 million -- $29.1 million of free invested cash flow during the year, an increase of 34% and the equivalent of $1.28 or $0.77 per share on a converted basis. After investing $3.4 million in pre-expansion capital, we have generated almost $25 million of cash prior to using any cash for growth capital. Of course, during the quarter, we did invest in growth capital of $1.2 million into properties that we had not been serving in the past. The result is free cash flow as we keep saying of $23.6 million, a 51% increase of the $15.6 million that we generated in the first quarter of 2009. This is the equivalent of $1.04 per common share or $0.62 per share on an as-converted basis.

And of course, lastly, slide number 12, we continue to reduce our leverage. During the quarter, we take down our debt by almost $43 million. In addition to using the free cash flow that we generated from the quarter to reduce debt, we utilized $13.7 million of the net proceeds raised from the recent equity offering to further reduce our debt because it was – we believe it was the best use of cash in the near term rather than just sitting in the bank.

As we accelerated our HD conversions in the second half of the year, we will in essence allocate more of our operating cash flow to these HD conversions because we have accelerated the reduction of debt during this quarter.

As a result of the trailing 12 months adjusted operating income and the lower debt, we have a consolidated leverage ratio of 3.5 times compared to 3.75 times covenant. And as Scott mentioned, on a net debt basis, our leverage is now at 3.51, essentially the level we need to be at by the end of September.

With that, I’ll turn the call back over to Scott.

Scott Petersen

Thank you, Gary. Before going to your questions, I just have a couple of comments. In our slide presentations on the website slides 13 through 15 review some of the facts and data points regarding the equity offering that we completed in March. We raised just about $14 million of growth capital through our registered direct offering we did through Craig-Hallum in mid March. We marketed the opportunity on a confidential basis for just one day and had a very strong book. We ended up selling 2.5 million primary shares at $6 per share and that equates to roughly about 7% numeric dilution on an as-converted basis.

Our plan is to take that growth capital now, it positions us to accelerate our transition to high definition systems, our net (inaudible) to fund doubling of our 2010 conversion plan or in other words, they will fund an incremental 55,000 or so additional rooms. We believe investing in high def systems will drive shareholder value as the high definition systems are performing well even in this very challenging economic environment.

On slide 14, that slide just reiterates our outlook for capital investment per new and converted high definition room. New rooms, we continue to look for an investment model of between $220 and $270. In a conversion room, which is an existing property that we have today and as those contracts reach – contract expiration, those hotels signing a renewal contract with us and we are looking at an investment level of only $150 or $200 per room for those conversional or renewal rooms. And the 40% or so reduction in our current outlook over the 2008 investment levels is due to a variety of factors as you will see in that page; technology advances being one major theme (has arrived in) the technology curve but also as the major television manufacturers are embedding our technology or communications technology into their sets and then of course, certain business model changes that have occurred in the hospitality industry over the past 12 to 18 months.

And then, lastly slide 15, it does update information that we provided you in February. Looking at a six month period of time, the HD rooms are continuing to produce 50% greater revenue than one of our average rooms. High definition revenue during this six month period of time was up 4% during this period versus the prior six months and that compares very favorably to down 2% for – our average room during this same period of time.

And then given the capital investment levels that I mentioned on the prior slide, the returns that we expect from our investments into these systems is very solid as we look to generate – (returning) our capital investment within a 18 to 24 month period of time. One of the commentaries you see in the bottom of the page, we only have these systems installed in 240,000 of our rooms, it's about 14% of our room base and that transition will expand as the economy recovers and of course, hotels pick more investments within – certainly with – into high definition television display devices. So that kind of – that will be a main economy driver of our company over the next several years.

And then turning to slide 16, just want to mention a few comments on the transition that's underway here at LodgeNet, as we know Gary announced his intention to retire last August, most of you who know us probably think Gary is younger than I am but there is a slight age differential and Gary is truly at an age to retire. And I guess I got to say I am very pleased that we have secured a very qualified candidate, or successor I should say, Frank Elsenbast.

Frank joins from Shop NBC where he was the CFO over the past six years. Frank was with Arthur Andersen for seven in its Chicago and Seattle offices, secured his MBA from the Carlson School and was with the Pillsbury Company for more than five years working in various finance roles. And Frank will be assuming the CFO role here within the week but will be working with Gary on orderly transition through the end of July and I am very please we have been able to create this opportunity for a very smooth and early transition. I think it will serve our company well and our shareholders at the same time. And I certainly want to thank Gary for his outstanding efforts and contributions for LodgeNet over the past nine years, doesn't seem that should be that long, but Gary, thanks for all your assistance there. And also I welcome Frank to the LodgeNet team. It’s four days under his belt and coming back every morning, which I think is a positive sign and I look forward to your controlling the success of our company and equation of shareholder value over the years to come Frank, so welcome aboard.

And then just closing up the slides, on slide 17, we have included our guidance for the second quarter. Once again, I believe this is a moderately conservative guidance based on guest entertainment and revenue being down about 5% to 10% versus the second quarter of last year.

On a per room basis, guest entertainment revenue that would translate into being about flat flattish to down around 5%, of course will be maintained in our low cost or lower operating cost structure that we have today during the second quarter also.

And then also the note that Gary did mention for the first six months, we continue to forecast free cash flow in the $33 million to $35 million and that keeps us on target for full-year guidance of the $60 million to $65 million range that we discussed in the February timeframe.

So with that, operator, would you explain the procedure for asking questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). First question comes from Frank McEverly from Craig Hallum.

Frank McEverly – Craig Hallum

Hi, good afternoon, everyone. Can you hear me okay?

Scott Petersen

Sure, can, Frank.

Frank McEverly – Craig Hallum

Nice execution in Q1. A couple of questions to start off; on the – the guest entertainment revenues, the buy rates sounds like it’s still kind of low, lower than you might have expected. How much of that do you think was attributable to the storm? Do you have any sense of what that impacts the storms in the – in the East Coast back in February, how much of an impact that might have been?

Gary Ritondaro

Well, certainly, January and February were impacted by the storms. They were certainly under where we expected them to be, but conversely March was – seemed to be a very strong month. So it was a mix between those two months. And of course March is the longest month of the quarter as well.

So from a mix point of view, it was better than – and it would have been had it January and February continued into March. I mean we don’t look at that on a month-to-month basis per se, but overall, the consumer still seems to be cautious out there. But if the months and the quarter continued into March, it seemed like there were some opening up of that.

The other thing we are looking at if the people were stranded, would that encourage people to buy. And I think some many people were pretty warned about the storm that we didn’t see a lot of that happening in that first part of the quarter.

Frank McEverly – Craig Hallum

Do you have a sense; was it like $1 million to $3 million revenue impact or do you have any sense for how much it was?

Gary Ritondaro

No, not, I would have to look at those numbers more closely.

Frank McEverly – Craig Hallum

So when you mentioned Gary, I think it’s in your remarks about the 3% to 4% occupancy improvement, was that in just the month of March, was that for the whole quarter?

Gary Ritondaro

That was for the whole quarter, but certainly had a more of an impact on it than earlier in the quarter.

Frank McEverly – Craig Hallum

Okay. And then I – there was a nice sequential increase in the hotel services, what was – is that purely of the increase in HD or are there are some other factors that may have contributed to the increase in guest services revenues? I imagine it’s probably pre (ph) the Guest TV?

Gary Ritondaro

Yes, it's pre (ph) the Guest TV. We continue to roll-out our HD product. We have also talked in the past about a major brand that we supply that on command had that we were subsidizing or are subsidizing heavily for their analog TV programming. And as they convert over to HD, we can do charge for service and we did convert quite a few number of rooms during the quarter, which improves revenue and also improves margins.

Frank McEverly – Craig Hallum

Okay. And then in terms of I guess looking at like the movies, news, Avatar, how long has that Avatar been in the – how much of it – and if at all, in the quarter was Avatar?

Gary Ritondaro

We didn’t not have Avatar in the first quarter. That was in April 1, we have it in the second quarter.

Frank McEverly – Craig Hallum

Okay. I will jump out of queue for now.

Scott Petersen

Thanks.

Frank McEverly – Craig Hallum

I will get back in the queue.

Operator

Our next question comes from Jim Boyle with Gilfred Securities.

Jim Boyle – Gilfred Securities

Good afternoon. With the movie theatres significantly raising ticket prices for both normal and 3D movies, would you be raising your rates in 2010?

Scott Petersen

Jim, we look at – we do constant price elasticity testing on that issue. And so we – at this point and time, we don’t have any specific plans, but I would also tell you, we don’t necessarily price each, all the movies at the same price. There tend to be a range.

Generally if the pricing in the theatre moves higher gives us cover so to speak to increase our price also, because a lot of times the comparison is that we – well we would like for guests to think about is to watch a first run movie in our room versus buying a ticket to the movie theatre, so that that could bode well for us. Don’t necessarily have a specific plan to do a general price increase, but trend wise that should help us in the future.

Jim Boyle – Gilfred Securities

Okay. And Scott the SDR (ph) data does seem to affirm business travel, especially perking up in Q1. And now in Q2, is there any increase in your buy rates on top of this higher occupancy or is it still an April kind of like Q1?

Scott Petersen

The buy rate is – is still tends to be soft. We have seen that consumer buying patterns has firmed up somewhat. They are clearly versus what we saw mid last year. But I think there is still a – the travelers still being relatively cautious at least when it comes to some of the products we are offering.

Jim Boyle – Gilfred Securities

And with Avatar in Q2, could Q2 guest entertainment per room revenue match Q3 despite usually Q3 has the seasonal bump?

Scott Petersen

While April, May, and June – so May tends to be a very much of that transition month between work and schools and the family leisure travels starting in June. So I would not think that’s the case and I am quite certain that you are going to find having the full months of July and August from a family travel standpoint, third quarter will still be our strongest revenue per room quarter for the year.

Jim Boyle – Gilfred Securities

How is Avatar doing so far in April?

Scott Petersen

Well, it’s doing fine. The one, of course, we don’t have the 3D version which really knocks the socks off in the theatre themselves. But it also is a longer film, which doesn’t necessarily – it’s not a great thing for hotels. A lot of people are looking for two hours and less kind of shorter films. So that’s the one drawback from Avatar, but it is one of our top films, there is no doubt about that.

Jim Boyle – Gilfred Securities

And how do you view the new iPad as a potential substitute to watch movies in the hotel room?

Scott Petersen

It has – it certainly has the possibility. Today, a high percentage of especially business travelers within a rooms bring a long lap tops that has DVD drives, then they also have Internet access. So I think the iPad has – what substitutes for the device carried by some of the travelers within our rooms, it clearly is probably a better viewing experience than the traditional laptop. But it also goes back to what content is available on a streaming basis. When it comes to the theatrical titles, once again, we still have the very earliest window, our biggest sellers from a theatrical standpoint are films are coming still in the theatre just ending their theatrical run and tend to be 30, 60 days before they hit the DVD window.

And then, of course, if you are looking at streaming, there is tend to be right now another 30 days built into that from those studios of not allowing the streaming versions of at least the most popular titles in film, the traditional DVD windows will seemed to be about 30 days long. So it’s one of those where we will have some sense of impact, but we are looking at ways that we can also maybe benefit from those types of technologies.

Certainly Internet enabled or Internet source content as we think about our next-generation systems that is front and center in our strategic planning and the idea would be that for either hotels would pay some type of system speed to allow their guests access to that type of content over through their high-def platforms or guest would pay some type of access speed to get to the Internet and use the television as a display device. So that is a work in progress, but the overall, we don’t see anything dramatically happening in the short term.

Jim Boyle – Gilfred Securities

Now in the old days for those of us with grey hair, I believe LodgeNet used to historically get roughly – was it 80% of a typical movie revenue in the first 30 to 45 days? What it is like now?

Scott Petersen

That very same thing Jim. It’s very predictable. It’s 70% to 80% within the first 45 days. So that front window is extremely important and I think that will be one of a – that is a significant barrier to entry or protection of our revenue or however you want to think about that, a driver of our revenues during this period of time. And I think that will also be a pretty sticky window and (inaudible) for long time.

Jim Boyle – Gilfred Securities

And I can’t Gary. So Gary, what’s the share count post offering as of now or recently?

Gary Ritondaro

Right now we have got about – on a converted basis, somewhere in the $40 million or a 40-million share range. We have about 25 million outstanding and that on a converted, it takes it for about 39 million to 40 million.

Jim Boyle – Gilfred Securities

Okay, thank you.

Operator

(Operator Instructions). Our next question comes from David Kestenbaum with Morgan Joseph.

David Kestenbaum – Morgan Joseph

Gary, as you leave the company, have you thought, I mean, how do you feel about the capital structure of the company and have you looked given the strength of that markets are maybe going to the public markets on the debt side and expanding those maturities and also moving away from the covenants?

Gary Ritondaro

Yes, we certainly continue to look at both sides of things. We have talked before, people ask, well, what are you comfortable with the leverage? And we tend to say that 2.5 to 2.8 times the leverage is where we think we need to be.

As you know we continue to invest our capital. So having a debt structure behind that is very important. We don’t want to be using equity financing to do long-term capital plan. And certainly as the economy has improved, so have the debt markets. And as you know our debt matures in 2014, it’s no secret that’s a big year for a lot of debts coming due.

So there’s certainly a possibility to start looking at moving out some of the maturities, I would, David, that something that Frank will probably be doing a lot of studying on over the next few quarters and who knows where we will go based on with the kind of interest rates in the deals that we can get.

Again, we enjoy a very good interest rate right around that 6.5 to 7.5 all in, including the swap. So any swap analysis or high yield would only increase our cost of interest and I think at this point we would rather use that additional cash to convert more of the properties to HD. But again, it’s something that generally we have looked at in the past and I think that the company will continue to look at.

David Kestenbaum – Morgan Joseph

Okay. And then on the healthcare business, you had some sequential growth, was that based on new hospitals that came on line this quarter or is that just a seasonality factor?

Scott Petersen

It’s – no, there is really not a seasonality so to speak in that business. We did install, I think it was five additional facilities during the first quarter. That builds on top of the facilities we already had installed last year. Right now, we are in the upper 40s, I think as far as the number of hospitals installed.

And then, of course, once the installation happens, we also had a long-term service contract that starts with the – with that hospital and we are generating somewhere between $25 and $30 of revenue per bed, per month for software and hardware maintenance content services, et cetera. So that service recurring revenue just keeps building as we put more hospitals on track.

The installation revenue tends to be a little balanced not necessarily from a seasonality standpoint like more usage or less usage, a lot of hospitals are on a June 30th, fiscal yearend, so we get a lot of contracts signed in in the third and fourth quarter for installation and a fourth and first and actually in second. And then they run out of budget money and wait for the next year and we start the cycle all over. So that’s the cyclicality that we see there, but that would not impact the revenues that we generate from the usage will be just kind of timing of installation.

David Kestenbaum – Morgan Joseph

Okay. And in the second quarter, do we have any new hospitals, can you give the number of beds that will be – come online in the second quarter?

Gary Ritondaro

I don't know the beds offhand, but we have three to four properties that are slated to be installed during the second quarter and early third quarter.

David Kestenbaum – Morgan Joseph

Okay, thank you.

Operator

We have a follow-up question from Frank McEverly from Craig Hallum.

Frank McEverly – Craig Hallum

Could you just – Scott and Gary maybe talk a little bit about your HD implementation schedule and what kind of properties you are targeting?

Scott Petersen

Certainly, so with the closing of the equity that we did in mid March, we put together a program targeting our best hotels and kind of the filter here is properties, the average is generating over 18 or more dollars of movie revenue per room, per month on the analog platform. And also the other filter would be that the size and profile of the property would get us into an installation costs, it would be below $200 per room. So the most effective way to do that was through direct mail campaign to these specifically targeted sites.

Those proposals are out the doors and they have been worked out for a couple of weeks, the sales team is very active there. One of the features we are providing for these hotels is a guarantee we will have them installed within 100 days, which of course given our capital reduction in capital plans over the last couple of years, and a lot of hotels were waiting well over one year before we would get around to installing them even if they were a very good property.

So we would look for – so second quarter generally right now would be the we call the sales quarter, getting deals put together for hotels. And under these proposals we are calling it the partners program where the hotels would look to either they buy the right television with our technology embedded from an LG or a Phillips or by the card that would be necessary to make that television compatible and of course have a clean Matv system, and then we would come in, and our investment really focuses on the equipment in the head end of the property, because of the central control center.

So anyway that’s why we assume – I think you can would expect that starting in the third quarter, the number of installations will start picking up as we convert those, as we signup those special deals and then get them into the installation queue. So overall, I am expecting a good solid response from hotels.

Frank McEverly – Craig Hallum

Great. And just on advertising, I noticed that was – the profitability weren’t quite a bit. I mean where do you see that, is that more of a – is that where it’s at, is that reaches kind of a target or do you see that’s still having opportunities to grow?

Scott Petersen

There’s still opportunities to go. As Gary mentioned, the nice improvement in revenue and in the margins in this past quarter was really driven by the new business model we implemented in the latter part of last year where we have two channels that are on our 10-channel systems that we are delivering into around 360,000 rooms where those channels are in essence paying us marketing fees to be part of the channel package. So that has changed our, increased our revenue, has reduced our cost of goods sold. So that’s like a permanent change.

We are seeing actually from an advertising insertion side, level kind of performance versus one year ago, then slightly up. So as the general ad market starts to improve, then it turns in – at this point then it is pure – pure might be a slight exaggeration, but it’s highly at the margin very high gross profit margins there. So you will start – you will continue to see I think nice improvements there. So this is – we came through a very rough period of time for advertising. I think we have got some very interesting things in the works.

Frank McEverly – Craig Hallum

Very good, thank you.

Operator

(Operator Instructions). I am showing no further questions. I would like to hand the conference back over to Ms. Parker.

Ann Parker

I 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 that is again www.lodgenet.com. The slides used during this webcast will also be archived on our website for your reference under the Investors’ section. And if you have any difficulty downloading those slides, we would be happy to send them on request.

Thanks again and have a good day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect. Have a wonderful day.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: LodgeNet Interactive Corporation Q1 2010 Earnings Call Transcript
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