Gemstar-TV Guide International Q4 2006 Earnings Call Transcript

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Gemstar-TV Guide International, Inc. (GMST)
Q4 2006 Earnings Call
February 28, 2007 5:00 pm ET

Executives

Robert L. Carl - Vice President of Investor Relations
Richard Battista - Chief Executive Officer, Director
Bedi A. Singh - Chief Financial Officer, Executive Vice President

Analysts

Mark Argento - Craig-Hallum
April Horace - Janco Partners
Todd Mitchell - Kaufman Brothers
Alan Gould - Natexis Bleichroeder
Barton Crockett - JP Morgan

Presentation

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter and full year 2006 Gemstar-TV Guide International earnings conference call. My name is Eric and I will be your coordinator for today. (Operator Instructions)

I would now like to turn our presentation over to Mr. Robert L. Carl, Vice President of Investor Relations for Gemstar-TV Guide. Please proceed, sir.

Robert L. Carl

Thank you, Eric, and good afternoon, everyone. I would like to welcome you to Gemstar-TV Guide's fourth quarter 2006 conference call. I am joined this afternoon by Rich Battista, Gemstar-TV Guide's Chief Executive Officer and Bedi Singh, our Chief Financial Officer.

We will begin today’s call with Rich discussing the strategic progress we made in 2006 and then Bedi will follow with a financial analysis of the year and then we will go right into your questions.

We issued a press release earlier this afternoon which detailed Gemstar-TV Guide's financial performance for the 2006 year which ended December 31, 2006. This release, along with our Form 10-K, contains more information regarding the company and its various segments, including detailed financials, analysis, and financial tables.

This information is also readily available on our website at www.gemstartvguide.com.

Before we begin, I would like to remind you that during this call, we may discuss our outlook for future performance. These forward-looking statements are typically preceded by words such as Gemstar-TV Guide or its management believes, expects, anticipates, foresees, forecasts, estimates or other phrases of similar import. All such forward-looking statements are not guarantees of future performance or results and are subject to risks and uncertainties that could cause actual results to differ materially from the views expressed today.

Some of these risks and uncertainties have been set forth in our earnings release filed earlier today and in our SEC reports, including our most recent 10-K.

With that, I will turn the call over to Rich.

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Richard Battista

Thank you, Rob. Good afternoon, everyone, and thanks for joining us for today’s year-end conference call. Today I plan to talk about some of our strategic accomplishments from 2006 as well as our direction and focus for 2007. Later in the call, our CFO, Bedi Singh, will discuss our results from the fourth quarter and the full year 2006. As Rob mentioned, at the conclusion of the call, we would be happy to take your questions.

Before I begin talking about the company’s strategic accomplishments and objectives, I want to comment on the recent ruling in our arbitration with the company’s former CEO, Henry Yuen. With this favorable ruling, the final chapter of a long and expensive saga has finally been written. As you are no doubt aware, the arbitrator denied all of Mr. Yuen’s wrongful termination claims. They also ruled that he is not entitled to any of the restricted cash which the company has held on its balance sheet since November of 2002 and that he is liable to the company for significant amounts that have been paid out by Gemstar-TV Guide.

We are obviously pleased with this ruling, the positive financial impact of which is detailed in the press release and 10-K we issued earlier today.

So putting that behind us and moving forward, 2006 represented a real turning point for the company, a year in which we began to deliver on the promise of our strategic vision. We spent a good part of 2005 developing our strategy and building the foundation necessary to successfully implement it. Getting to where we are now has required the hard work and dedication of a lot of people. It also required instilling a results-oriented collaborative culture that extends across the company’s various businesses.

I am very proud of our accomplishments in 2006 and I believe we are now well-positioned to maximize our potential in the marketplace.

We had a very productive fourth quarter which closed out a solid year for the company. Throughout 2006, we were highly focused on making progress in several important areas that are core to our strategic mission and I believe we made great strides. As you have heard me say before, our goal is to be the leading provider of video guidance across multiple media platforms. We also seek to enable consumers of video to maximize their enjoyment of the myriad of offerings available to them on both traditional and emerging platforms.

To get us there, we have strengthened our execution in four important areas, specifically: product development and technology; IP licensing, both international and to emerging platforms; expansion of our presence on a variety of digital platforms; and the brand revitalization and cross-platform collaboration.

I will update you on our progress in each of these areas, and then I will circle back to cover a few other operational highlights.

First, in product development: in early 2006, we established a cross-platform product development and technology group to better integrate our development activities across the company and to address the guidance needs of our emerging platforms.

As a guidance company, we are now focused today not just on the traditional media platforms but also the expanding universe of new media, including broadband video, video-on-demand, and mobile phones.

During 2006, this new group worked to streamline and integrate our product development plans across the company and more importantly, we began the process of building products and services to address next generation guidance needs.

The suite of next generation products and services we are developing will allow consumers to seamlessly manage their viewing options at any time from any place and from a variety of devices in an integrated and coordinated fashion. TV Guide's unique entertainment content and data will play a central role in differentiating these product offerings in the marketplace.

We believe that these products and services, which we will begin to deploy in 2007, will offer a more personalized guidance experience for consumers through targeted programming recommendations, customizable user interfaces, and the ability to receive richer content and information around their favorite shows and stars.

In 2006, we also expanded our focus on our technology and licensing business and as a result, grew our global customer base. Signaling the growing value of Gemstar-TV Guide’s intellectual property around the world and in new media platforms, this past year we signed new IPG licensing agreements with BSkyB, Yahoo! and PRESENTCAST, a broadband portal which is a joint venture among Japan’s leading broadcasters and ad agencies.

In the digital media arena, 2006 was a year that saw key accomplishments for TV Guide. At TV Guide Online, we focused on improving the tvguide.com site and increasing its reach. We launched a redesigned site in September ’06, one that is a far better consumer experience which capitalizes on the strength of our brand and the depth of our content. Now, our site incorporates more broadband video, boasts one of the most active TV web communities, and features a best-in-class entertainment search functionality.

We are beginning to see positive user responses to the improved website. In 2006, the number of unique monthly visitors to the site grew by 20% over the previous year to an average of 3.1 million, and the site saw a 36% increase in page views to 676 million during that same time. In addition, to further extend our reach, we have begun syndicating our listings grid and content to third-party sites.

We have also made some small acquisitions in the online space, adding several television-focused websites, including JumptheShark.com, which we relaunched today.

We are continuing to make improvements to our online properties and have some exciting developments that we will roll out over the next coming months.

Another accomplishment in the digital space was the growth of our TV Guide mobile business, which is just over a year old. This business is another example of how we are extending our guidance mission to an emerging platform. We are currently offering a home-based IPG listings grid and video content and have signed agreements with the major mobile carriers, Cingular, Sprint and Verizon.

We believe that a significant opportunity for us in mobile is the creation of a guide designed specifically for mobile video content, which we call an ESG, or electronic service guide. We have partnered with a leading mobile technology developer, Round Box, to work with us on this guide. The ESG, which is expected to be field tested later this year, will enable consumers to navigate multiple forms of mobile video through an easy-to-use familiar interface.

In 2006, we grew the distribution of our cable on-demand network, TV Guide SPOT, and launched a new on-demand business for the Internet called TV Guide Broadband. TV Guide SPOT is now distributed in more than 26 million homes, a 69% increase year over year. TV Guide Broadband, an ad-supported broadband video-on-demand service, launched during the year. To date, we have secured distribution for this product on AOL video, Google video, the VO networks and of course, tvguide.com. It is also available on and syndicated to third-party sites through Bright Cove.

In terms of revitalizing the brand, the company took some important steps forward in 2006. Our first chief marketing officer, [Ivan June], is overseeing the company’s cross-platform marketing initiatives while also managing the growth and evolution of the TV Guide brand.

Given the improvements we have made to our existing products over the past 18 months and our rapid expansion into the digital marketplace with new products, I believe this year is the appropriate time to devote resources to a new TV Guide brand marketing initiative.

Our place within a fast shifting media landscape needs to be redefined and to that end, later this year we will launch a cross-platform national advertising campaign designed to drive usage of our products and to reinforce the message that we are not solely a magazine business but instead a vibrant, multi-platform media company.

Now I will touch on a few key operational highlights for 2006. At TV Guide Magazine, we finished our first full year publishing in our new full-sized format and I am pleased with the evolution of the product. We generated over 3.2 million new subscriber orders in the 2006 calendar year, including 1.5 million renewal orders and 1.7 million new orders. Further, our total weekly readership, as measured by MRI in November, 2006, was estimated at $21.3 million, making us the second-most widely read magazine behind people among all entertainment celebrity titles.

At TV Guide Channel, we remained focused on continuing to improve our program lineup to position the channel as a full-fledged television entertainment destination and not just a utility service. We doubled our hours of original programming and our investment is seeing favorable results.

One new program launched last year, Idol Tonight, had a particularly impressive ratings story. Its average rating across all first airings of the weekly series saw an average 29% increase over the same time periods in 2005. The program returns for its second season on March 14th.

Watch This, our nightly TV preview show, was revamped in November ’06 and since that time has delivered consistent month-to-month ratings growth.

And our instant specials, which are based on relevant breaking news, have recorded some of the channel’s highest ratings of the year.

In addition, we have seen a 7% increase over the prior year in the average total day length of tune of the network.

The channel’s average distribution reached the 80 million home subscriber mark and we saw a 9% increase in national advertising revenue. We added 65 new advertisers in 2006, including 14 blue-chip advertisers, such as AT&T, Sony, Wal-mart, and General Mills.

Turning now to our IPG businesses, in 2006 we combined the operations of our CE and cable satellite groups under common leadership. This move has resulted in improved cost efficiencies and in the sharing of best practices in research, product development, sales and marketing.

Our strategy is to have the broadest possible IPG product line, offering guides for any environment regardless of platform.

To that end, in 2007 our IPG will be offered for deployment for the first time on a full range of Scientific Atlanta devices. We will also begin to field test the J Guide IPG, our first IPG designed specifically to meet the standards of OCAP. As you know, OCAP is the new industry specification for interactive services designed to run on a broad range of advanced digital set-top boxes in cable ready TVs.

In the CE space, we signed several new IPG patent license agreements with major manufacturers, such as Phillips Electronics, Samsung, and Panasonic. Also, our CE IPG technology revenues showed a 46% increase in revenues versus the prior year. This came primarily from additional unit shipments from existing CE clients.

On the corporate side, we continued to invest in our operational infrastructure. We launched a project to modernize our extensive TV show listings database with an interactive, automated content management system featuring not just rich-listing data but also video, audio, photographic and editorial content. This will be a key ingredient for our future product initiatives.

In these revolutionary times in the media business, our company and our brand are both evolving to fully reflect all that we have to offer to our business partners and to consumers. 2006 was a transformative year at this company. With our legacy issues now behind us and with a clear strategy and direction for future growth, I believe we have begun to capitalize on the opportunities that exist for us in the marketplace. I am confident and enthusiastic about our company’s growth prospects as we continue to build on the strength of our assets to deliver on our mission of being the leader global provider of video guidance across multiple media platforms.

I will now turn it over to Bedi who will cover the financial performance of the company in 2006, and then we will take your questions. Bedi.

Bedi A. Singh

Thanks, Rich. As Rich discussed, this past year we made significant progress in a number of our businesses. This, along with other developments I will discuss in a moment, helped produce a strong financial performance in 2006.

Year over year, excluding the magazine business, our consolidated revenue increased 12%. Adjusted EBITDA on a consolidated basis increased to over $102 million compared with an ’05 loss of $6 million, due to both an increase in revenues from our improving ongoing operations and the reversal of $40 million in accrued expenses resulting from favorable outcomes on legacy legal matters related to two former officers of the company.

Operating income for ’06 was $67 million, up $103 million compared to ’05 and net income was up 32%, with resulting earnings per share of $0.17 for the year.

At December ’06, our cash and marketable securities were $514 million, an increase of $39 million versus December ’05. As you will note on the balance sheet at December ’06, we still have a restricted cash balance of $32 million. Of this, $31 million is related to the Yuen matter. We expect this cash to become unrestricted once we receive a final court, anticipated to be in the first-half of ’07.

We generated $76 million in positive cash flow from operations in ’06, compared with a negative cash flow of $122 million in ’05. The increase was mainly due to higher operating income and income tax refunds in ’06 versus significant tax payments in ’05.

Higher prevailing interest rates and improved cash management earned nearly $27 million in net interest income versus $16 million the year before.

For the remainder of my portion of the call, I will touch upon full-year segment results, comment on key factors that contributed to ’06 performance, and our outlook for ’07.

For the cable and satellite segment, we achieved an 11% increase in revenues versus ’05, reaching just over $300 million for the year. TV Guide Interactive experienced the strongest growth within this segment, with revenue up 20% year over year, driven by 22% growth in U.S. digital households under IPG licenses. We particularly benefited from strong growth during the year in the Time-Warner and DirecTV systems. In addition, our results were positively impacted by the licensing agreement we entered into with BSkyB in the U.K. during the fourth quarter.

We are encouraged with the growth prospects in our IPG business. Firstly, we see continued digital migration in North America, which will grow revenue as analog households convert to digital. Secondly, we see new revenue opportunities in the next couple of years internationally, especially in Europe; and lastly, we also see a future potential for advertising revenues within the existing domestic footprint of deployed IPGs, although it is still too early to gauge the magnitude of this opportunity.

On the operating expense side, as Rich mentioned, in ’06 we made the decision to combine our domestic IPG organizations to form one unified group. This move has not only strengthened our team, it has also allowed us to be more cost-efficient going forward.

Turning to TV Guide Channel, here we experienced 4% revenue growth in ’06 versus ’05. While this is low single digit, it is nevertheless encouraging, given the shift in our viewership mix, with digital, cable and satellite homes in ’06 together grew by 7 million homes while analog homes declined by 5 million.

As we discussed on prior calls, the number of analog homes is expected to continue to decline as more and more subscribers upgrade from analog to digital cable or migrate to newer digital platforms, such as satellite or IPTV.

This poses a challenge for the channel, as its viewership has historically come from analog cable homes where scroll data is utilized for guidance. Digital cable and satellites systems, which have many more channels, generally use an IPG rather than our scroll for listing information.

In order to ensure that the channel remains a compelling destination for all viewers, we have made consistent and reasonable levels of investment in original and better quality programming. We were able to maintain our overall total day national household rating virtually at the same level of ’05 despite the decline in the number of analog cable subscribers in ’06.

This was due to an increase in length of tune as well as, for analog homes, an increase in ratings. We believe these increases are related to our investment in programming for the channel. Ultimately, we believe our programming investment will lead to increased viewership from our total distribution, analog cable, digital cable, and DBS households.

Given the change in viewership mix, it is important to note that in ’06, TV Guide Channel’s total advertising revenues were up 4% and our national ad revenues were up 9%. These increases were better than for the overall cable ad market during the period, which grew in the low-single digits.

For 2007, we will continue to invest in original programming at slightly higher levels than ’06 and project only moderate revenue growth.

TVG Network also made good progress in ’06. By year-end, domestic household distribution totaled over $19 million, an increase of 8%. In addition, we now broadcast to 11 million international households in the U.K. and Ireland who joined the network in Q107 through our international ratings partners, ATR and TRNI. Domestic handle increased 9% and revenue increased 11% as a result of higher wagering volumes from our own operations and from those of our licensees.

To sum up the cable and satellite segment, continued distribution growth for domestic license IPGs, new IP licenses and revenue growth from both of our cable networks produced 11% year-over-year revenue growth in the segment. Good fiscal management and generally higher overall margins resulted in a 23% increase in adjusted EBITDA, finishing the year at $134 million.

Turning to the publishing segment, TV Guide Magazine came in ahead of its ’06 operating plan. This success that we had in ’06 was attributable to stronger advertising sales in the fourth quarter and achieving planned cost reductions.

Ad revenues and paging for the last 11 issues of Q406, which was the first time a relevant comparison could be made, were up 72% and 48% respectively. Growth was primarily driven by higher-than-expected advertising from pharmaceutical and packaged good companies.

In ’06, we achieved significantly lower costs of production due to the magazine’s new business model and increased our subscriber revenue per copy by 23% versus the prior year. We also managed down our headcount and reduced marketing and promotion expenses compared to ’05, contributing to the reduction in operating costs at the magazine.

For 2006 fourth quarter and full year, we came in slightly better than our previously projected loss range for the magazine and we plan to further reduce operating losses in ’07 by another $9 million to $14 million, consistent with the guidance we gave on our last call.

Moving to TV Guide Online, our redesigned tvguide.com website increased its unique users, page views, impressions, and CPMs, all of which resulted in revenues of $10 million in ’06, a 28% revenue increase over ’05.

As Rich mentioned, over the past three quarters, we made several small online acquisitions, having an aggregate of 1.2 million unique users in December ’06.

To sum up ’06 for the publishing segment, we executed on the TV Guide Magazine plan in terms of cost reductions and other improvements and adjusted EBITDA decreased to a negative $46 million for the segment.

Moving on to the consumer electronics segment, Rich already commented on the new agreements we signed during the year. These new deals, along with continued volume growth from existing customers, resulted in over $100 million in revenues in ’06, a 13% increase over ’05. What makes this achievement even more significant is the fact that this growth was attained in the face of declining VCR Plus revenues.

Looking specifically at the individual lines of business, CE IPG patent licensing revenues increased 55% versus ’05. This growth was primarily due to new license agreements at Samsung, Yahoo!, and a full year of set-top box shipments by Scientific Atlanta, whereas in ’05, we had only revenue in the fourth quarter from Scientific Atlanta. We anticipate continued double-digit revenue growth going forward.

CE IPG technology revenues increased 46% versus ’05. Here growth came primarily from greater DVR and digital television incorporations and year-over-year increases in shipments from Panasonic, Pioneer, Toshiba and Samsung. We expect this business to deliver double-digit revenue growth in 2007.

VCR Plus revenues declined 15% year over year due to a reduction in units shipped and the absence of reporting from two CE manufacturers for most of 2006. Earlier this week, we reached agreement with one of these two manufacturers and expect to have done so with the other one by the end of first quarter 2007. However, as the market continues to shift away from VCR Plus, we anticipate further reductions in worldwide unit volumes going forward and project double-digit declines in revenue in 2007.

For the CE licensing segment as a whole, increasing revenues and cost reductions contributed to adjusted EBITDA of $49 million, a 23% increase over ’05.

For 2006, the corporate segment had adjusted EBITDA of negative $35 million compared with adjusted EBITDA of negative $61 million in ’05. This improvement was primarily due to the reversal of $40 million in accrued expenses relating to the two former officers of the company, offset by increased strategic initiative spending.

Adjusted EBITDA in the fourth quarter ’06 was a positive $8.5 million, compared with adjusted EBITDA of negative $19 million in Q405. Excluding the reversal of $29.5 million related to the Yuen ruling, adjusted EBITDA would have been a negative $21 million in the fourth quarter of ’06. This was slightly higher than the previous year’s quarter but in line with the outlook we provided in our Q3 call regarding our planned expansion of the product development and technology groups in the second-half of ’06.

In 2007, we will continue to pursue strategic initiatives to better position ourselves as the leading consumer brand for video guidance across multiple platforms. We anticipate that these initiatives will result in additional capital and operating expenditures.

In ’06, we made capital expenditures of $34 million and in ’07, we project lower capital expenditures of approximately $24 million to $28 million. For 2006, operating expenses related to strategic initiatives were approximately $19 million, which included $12 million for cross-platform product development and technology initiatives. In ’07, we anticipate incurring approximately $35 million to $45 million of such expenses, including approximately $19 million for cross-platform product development and technology.

We also anticipate operating expenses of between $15 million and $20 million for corporate marketing including, as Rich noted, launching a major cross-platform marketing campaign to drive greater usage of our products and elevate our brand. This is likely to be incurred in the second-half of this year.

So to sum up the year, our cable, satellite and CE IPG businesses saw increased worldwide market expansion and combined revenue growth of over $40 million year over year. Our media networks, TV Guide Channel, EPG network and TV Guide Online, increased revenues year over year by a combined $13 million.

We cut operating costs significantly at TV Guide Magazine, while at the same time delivering a product that increasingly resonates with consumers and advertisers. We implemented our internal financial system on time and on budget and continued our cost reduction programs across all business units, including general corporate overhead. We resolved significant legacy issues with two former corporate officers and recorded a $40 million adjusted EBITDA benefit as a result. Finally, we increased earnings, enhanced the company’s growth prospects, and delivered value to customers and shareholders.

With that, I will hand the call back to Rob.

Robert L. Carl

Thanks very much, Bedi, and thank you, Rich. I will ask the operator now to please advise our listeners as to how they can enter the queue for questions and then we will take a few of your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Mark Argento with Craig-Hallum. Please proceed.

Mark Argento - Craig-Hallum

Thank you. The first question on the branding campaign, could you speak a little bit more specifically about how you are going to go about it, what your ultimate goal is, how you are going to measure the return you get, and then also could you just clarify a little bit, did you say $15 million to $20 million in incremental spend for that branding campaign? I just wanted to get a little bit more color there. Thanks.

Richard Battista

The $15 million to $20 million is a total amount for corporate marketing. Inside of that is the marketing campaign. A little more color on that, for us as I said in my comments, we certainly believe it is the appropriate time to unveil such a campaign. I would say it is really two-fold; one it is clearly to drive more usage of our product, so there is an obvious ROI return to that, and the goal is to get more consumption of our products across all of our TV Guide branded platforms.

I do believe, as I said in my comments, there is a bit of an intangible benefit and value to this as well. This is a company that historically has not spent a lot of money to improve the brand and make it more relevant and I believe this is an important step for us to make as we traverse into the digital world and to raise the visibility of our brand and the perception of our brand in today’s media landscape.

Those are really the two pieces of it.

Mark Argento - Craig-Hallum

Just refresh my memory in terms of the general marketing budget. I am just trying to figure out your incremental spend you guys anticipate as I am putting together the model here. I just wanted to make sure I have that factored in correctly.

Bedi A. Singh

$15 million to $20 million, as Rich said, is the total marketing budget of the company. We did not have a significant marketing expense in 2006. It is difficult to say exactly what the incremental would be, but --

Mark Argento - Craig-Hallum

But it is the lion’s share of that?

Bedi A. Singh

I would say that, yes.

Mark Argento - Craig-Hallum

Lastly, when it comes to the TVG Network business, I know you guys have been working with Churchill Downs and you guys walked away from that relationship, or trying to renegotiate that deal. Do you anticipate that is going to have a material impact to your business? How should we think of that line item for 2007?

Bedi A. Singh

Churchill Downs as we I think said in our press release was becoming a relatively small piece of our TVG Network business and we do not expect this to have any material impact on our numbers.

Operator

Your next question comes from the line of April Horace with Janco Partners. Please proceed.

April Horace - Janco Partners

Rich, I have a couple of questions with respect to how many months of revenue did you have from BSkyB in this quarter’s numbers? As well as when you talk about corporate overhead and the marketing, one, I congratulate you. I think you should be marketing the channel and all the different products and stepping that initiative up to the consumer, but if I look at this year’s corporate overhead, it’s about $63 million but that included about $20 million of IT upgrades you had. Can you give me any color on that? I also have a follow-up.

Richard Battista

On BSkyB, I believe we had one month of revenue.

Bedi A. Singh

One quarter.

Richard Battista

One quarter, the last quarter of revenue attached to it.

April Horace - Janco Partners

So it was all three months, or is it just one month?

Bedi A. Singh

It is just the quarter.

Richard Battista

The deal happened at the end of the fourth quarter but the revenue is associated with the quarter.

Bedi A. Singh

What was the question on overhead?

April Horace - Janco Partners

The question on corporate overhead is if you take out the Yuen settlement, you are at about $63 million, but this year you had about $20 million plus associated with some IT activities which would go away next year, so are we just replacing the IT with the corporate marketing?

Bedi A. Singh

What we had in corporate overhead was product development costs and we are seeing an increase in product development costs from ’05 to ’06. We had Oracle, which is clearly going away but it was not the kind magnitude that I think you are referring to. I do not think we broke out a number for Oracle in the past.

April Horace - Janco Partners

Okay, and then --

Bedi A. Singh

-- decreased because we had finished with Oracle but we are also ramping up product development, and then we have the marketing cost that we talked about.

April Horace - Janco Partners

So on a year-over-year basis, corporate overhead could increase about another 10%, 12%? Would that be unreasonable to model?

Bedi A. Singh

I think if you are including within corporate overhead marketing costs and product development and technology costs, yes, that is going up because those two things are incremental.

April Horace - Janco Partners

Okay, I will take that answer. Then, when you talk about the CE licensing growing in double digits in ’07, when you say double-digits, that could mean anywhere from 10% to 90%. Can you narrow that down a little bit?

Bedi A. Singh

You are absolutely right. It could mean any of those things and that is why we chose the words double-digit. I do not think we are giving specific -- unfortunately, we are not giving specific numbers on that.

Operator

Your next question comes from the line of Todd Mitchell with Kaufman Brothers. Please proceed.

Todd Mitchell - Kaufman Brothers

I am going to try to get at the question April asked, just in another way. On the CE side, can you tell me when you went into this fourth quarter, how many SKUs in terms of how many devices you were licensing to? I know you have disclosed that number in the past, and what that was on a year-over-year basis?

Richard Battista

How many devices that we were incorporated in?

Todd Mitchell - Kaufman Brothers

Yes.

Richard Battista

Or that we were licensing to for the patent licensing?

Todd Mitchell - Kaufman Brothers

Yes, exactly.

Richard Battista

We will get that for. We do not have it at our fingertips.

Todd Mitchell - Kaufman Brothers

Another question, on this -- you talked about one of the investment items that you will have going forward in addition to the brand marketing was an increased infrastructure spend in order to revise your listing services. I understand a large part of that has been taking it from an analog to digital infrastructure. Could you flush out what that means from an operational -- what does that mean to your offering and what will that enable you to offer, other than just straight data?

Richard Battista

It is a couple of things. Part of the benefits to that are internal benefits in how we operate our business and making it more efficient in the future, so by being able to create more automation, that is going to allow us to be much more efficient in the future, so part of this is an investment with clearly an ROI attached to it.

What it also is going to do is take all of the content at the company, be it a magazine article, be it a video from the channel, be it an online article, be it a photo, and have it all housed in one integrated database and one integrated server, so that we can much better allocate that content and have it move seamlessly across our products. So you can imagine, for instance, if you are offering on tvguide.com content related to Desperate Housewives, we now have a much more efficient and robust system to push that content out in all those different formats to a consumer.

It is really about ameliorating the tools that we have as a company and making it much more efficient and automated.

Todd Mitchell - Kaufman Brothers

So instead of just getting listing data, I can go in deeper and maybe get a review down the road on one of your platforms or something?

Richard Battista

Sure, or I could get a video clip of an interview from a star of that show from the red carpet the night before, and right next to that could be a photo from that set of photos from that show, and right next to that could be an article we wrote in the magazine on that show, and right next to that could be an article we wrote on the website for that show, and right next to that could be a podcast that we had done on that show, and --

Todd Mitchell - Kaufman Brothers

Great. I think I understand what that would mean in terms of your offering and the rationale for doing that. What does that mean in terms of, and you have kind of put a number around the spend, but what does it mean though -- what exactly are you spending on?

Richard Battista

It is to create automated systems, you know, computerized systems, building code, building software that allows us to make systems that have typically been manual and making them more automated. That is really the biggest spend.

Todd Mitchell - Kaufman Brothers

And this infrastructure spend is, I assume it is largely one-time in nature? It is to basically build a virtual library for this stuff, right? And then --

Richard Battista

I think that is actually a good way of saying it and the answer is yes.

Bedi A. Singh

We have an answer for you. You wanted the -- there were 183 new --

Todd Mitchell - Kaufman Brothers

I’m sorry, I didn’t hear that?

Bedi A. Singh

There were 183 new SKUs in ’06.

Todd Mitchell - Kaufman Brothers

There were 130?

Bedi A. Singh

One thing I will caution you on is that some of our deals also have all-you-can-eat elements in them and if you read our K you will see we break out the different sorts of deals that we have. So just focusing on SKUs does not necessarily correlate to revenues.

Todd Mitchell - Kaufman Brothers

Right, but that 183 number is an incremental number for the year?

Bedi A. Singh

Yes, in ’06, yes. And mostly in Asia.

Operator

Your next question comes from the line of Alan Gould with Bleichroeder. Please proceed.

Alan Gould - Natexis Bleichroeder

I have a few questions, if I could. First, Rich, how much of the magazine’s editorial costs are shared by the other areas of the company? Second, what was the increased programming on TV Guide, or if you can give us some magnitude of how much ‘07’s increase will be relative to ’06’s increase? Third, if you can discuss the magazine circulation. You have a 3.2 million rate base and I see you are down to about 3.0 on the paid, so what the trend is there. And lastly, you are now free cash flow positive. Rich, in the past you have said you did not want to buy back any stock, certainly not before you were free cash flow positive, so Rich or Bedi, what your thoughts are on share buy-back?

Richard Battista

First question, on the editorial for the magazine, a minimal amount of costs from the magazine are shared by other units. There is a lot of cross-pollination that happens but there is not a big number that gets allocated out to other platforms.

Your question about the circulation, our rate base is 3.2 million, so you are seeing about 3 million subscribers, couple hundred thousand newsstand, that gets you to the 3.2.

Alan Gould - Natexis Bleichroeder

But that has really come down fairly quickly, the paid portion.

Richard Battista

Not really. It has come down exactly how we thought it would. In fact, it actually happened more slowly than we thought it would. We were in the high 3’s in early ’06.

Alan Gould - Natexis Bleichroeder

Right, it was 3.42 in third in September and 3.04 or 3.05 at the end of the year.

Richard Battista

That is what we planned and anticipated.

Alan Gould - Natexis Bleichroeder

And that trend should continue then?

Richard Battista

We now believe we are now at our level of circulation rate base. That has been stable now for the last three or four months.

Then you had asked about the buy-back.

Alan Gould - Natexis Bleichroeder

And also the investment programming on the TV Guide Channel.

Richard Battista

Why don’t we answer the programming cost question -- it is a slight increase. I do not want to give specifics but it is a pretty minimal increase in the bigger scheme of things.

Alan Gould - Natexis Bleichroeder

Okay, and the buy-back?

Bedi A. Singh

I think we are mindful of that fact that this is an option. We are cash flow positive but at the present time, we believe that there are other uses for this cash that are more strategic and we are actively looking to put it to use. We do not plan doing stock buy-back at this time and we would like to preserve our ability to react to strategic opportunities.

Alan Gould - Natexis Bleichroeder

But you are talking about $500 million or so in cash, so are you implying by strategic options potential acquisitions?

Bedi A. Singh

I think we have said before and I think Rich has said before we will look at acquisitions.

Richard Battista

Absolutely.

Robert L. Carl

Operator, we will take one more question, please.

Operator

Your next question comes from the line of Barton Crockett with JP Morgan. Please proceed.

Barton Crockett - JP Morgan

I wanted to ask I guess first to clarify, to make sure I understand everything you put out there about the corporate. It looks like the incremental spend in corporate is going to be up $40 million to $45 million if you sum the two things you’ve got, $15 million to $20 million incremental on the advertising and in terms of the strategic initiatives, you spent $19 million in ’06. You will spend $45 million or so in ’07, so the net change excluding the Yuen settlement in ’06 is about $45 million. I just want to confirm that is correct.

Bedi A. Singh

Actually, that is not because the incremental spend on product development is around $7 million and marketing I said was about $15 million to $20 million, so if you take those two numbers together, that is the incremental spend.

Barton Crockett - JP Morgan

Okay, all right. So what was the $45 million number that you put out?

Bedi A. Singh

That was the total for strategic initiatives.

Barton Crockett - JP Morgan

I thought it was $19 million, but that’s fine.

Bedi A. Singh

The main thing was product development and technology.

Barton Crockett - JP Morgan

Okay, so you clarified that, which I appreciate that. The second thing is, just looking at the investment in the TV Guide cable network, I am just wondering if you guys may be aiming a bit low here, I guess to borrow a line from the Oscars. And that is that if you look at the assets that you have and values that have been set in the marketplace, one of the things people look at is the E! Entertainment network, which has audiences maybe 30% or so above your network, and that thing was valued in a recent transaction arguably in the couple billion dollar range. You guys are nickel and diming here in terms of incremental spend on programming, but you are willing to put $100 million into the magazine. If you could get this cable network up to kind of an E! network level of audience, the valuation that you would be awarded there could be much better than anything you could get out of the magazine.

I am just wondering, why so modest in terms of the incremental investments there? Isn’t there more opportunity? If you could address that, I would appreciate it. Thanks.

Richard Battista

I think the programming, if you look at the programming we have spent cumulatively over the last three to four years incrementally, it is a pretty significant number from where we were. It is easily plus 25%, 30%. To me, those are real dollars, and the fact is on the programming side, we believe the moves we have made are the right moves to move this asset forward. To be fair, I think it is smart to be prudent about how you move forward in the TV network business. Just cutting big checks in programming is not necessarily the right thing. In fact, I think E!’s programming budget is probably three to four times ours, but their ratings may be 20%, 30% higher than ours. So there is not a correlation necessarily in spending all kinds of dollars.

I guess the other thing I would say is we feel good about where we are going with the network and we are encouraged by it. The other thing I think is important to point out and we have said this before in our statements is we do have a quite low affiliate rate for the network, which is fixed for a long time. Because of that, we do not necessarily have the luxury that other companies like E! do because I am also mindful of generating profits and making sure we have a business that grows solidly. So that is another issue we have to face.

Barton Crockett - JP Morgan

Then just one other question, turning to the TV Games Network. The revenue trends year to year have been so lumpy, variable as we look through the quarters of this year, a good quarter here in the fourth quarter. Can you give us any sense of what to fasten our seatbelts for and expect as we go through next year? Any reason it should average out and maybe comp with what we have for the full year, or is there potential for big swings as you work through stuff?

Bedi A. Singh

With the TVG network, it is difficult to give any sort of quarter by quarter projections, unfortunately. I think a lot of it is wagering based and it is very seasonal, depending on the races. For example, in ’06 second quarter I think we had, there was a tail-off in wagering in California. It came back. It is stuff that is not in our control so it is difficult to really give any meaningful projections on that going forward.

Robert L. Carl

Thank you everybody for joining us this afternoon and we look forward to speaking with you again on our next conference call. Operator, if you could give our listeners instructions as to how they could hear a replay.

Operator

Ladies and gentlemen, your host is making today’s conference available for replay, which will be hosted for one week following the conclusion of the call. To access the replay, call 800-299-7635 or 617-786-2901 for international. The conference ID number is 84969214. An audio archive will also be hosted on the company’s Investor Relations website at http://ir.gemstartvguide.com. Replays will be available approximately two hours following the conclusion of the call.

This concludes our conference call. Thank you very much for your participation. You may now disconnect.

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