Gemstar-TV Guide International Q1 2007 Earnings Call Transcript

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Gemstar-TV Guide International, Inc. (GMST)
Q1 2007 Earnings Call
May 3, 2007 5:00 pm ET

Executives

Robert Carl - VP of IR
Rich Battista - CEO
Bedi Singh – EVP & CFO

Analysts

Alan Gould - Natexis Bleichroeder
April Horace - Janco Partners
Abhijit Chakrabortti - J.P. Morgan
Todd Mitchell - Kaufman Brothers

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Q1 2007 Gemstar-TV Guide International Earnings Conference Call. My name is Antwan, and I will be your operator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference (Operator Instructions).

As a reminder this conference is being recorded for replay purpose. I would now like to turn the call over to Mr. Robert L. Carl, Vice President of Investor Relations. Please proceed sir.

Robert Carl

Thank you very much Antwan. I would like to welcome you to Gemstar-TV Guide's first quarter 2007 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 first quarter of 2007 and then Bedi will follow with a financial analysis of the quarter, we would then go right into your questions.

We issued a press release earlier this afternoon, which detailed Gemstar-TV Guide's financial performance for the first quarter, which ended March 31, 2007. This release, along with our Form 10-Q, 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 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-Q.

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

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Rich Battista

Thank you, Rob. Good afternoon, everyone, and thank for joining us for today’s first quarter conference call. During the call I will cover some of our key accomplishments from the quarter. I will also highlight a few of our Q1, as well as, more recent announcements, which I believe reflects the significant momentum in our business and the progress we are making in executing on our strategy.

Later in the call, our CFO, Bedi Singh, will discuss our financial results from the first quarter and he will detail the new manner in which we will be discussing our segment information. And as Rob mentioned, at the conclusion of the call, we will be happy to take your questions.

As we indicated in our last call, 2006 represented a real turning point for the company. We moved from strategic planning mode into execution mode. We finished 2006 strong and have begun 2007 in similar fashion. We saw 9% revenue growth year-over-year and strong EBITDA growth, as we continue to strengthen our execution as cross all of our businesses.

At the end of quarter, we acquired Aptiv Digital, a highly complimentary company that will assist us as, we continue to develop and deploy leading end products and services in the guidance arena.

We spent a good part of this passport or are continuing the development ground works for product launches, that are key to fulfilling our strategic mission, providing guidance solutions for consumers in an increasingly complex media environment.

This morning, we announced the début of My TV Guide, sweet of products and services that offer cross platform personalized video guidance solution. In addition in April, we launched a beta version of our new Online Video Guide. Both My TV Guide and the Online Video Guide are designed to help consumer simplify and maximize their personal entertainment experience. I'll come back to this in more detail in a few moments.

So with all that as background, I would now like to touch on a few operational highlights from the first quarter. Starting with the TV Guide Channel or as it will be referred to beginning in June, TV Guide Network. The Network now has distribution in more than 80 million households, but we are continuing to see a migration from analog to digital.

Comparing Q1 of '07 to Q1 of '06, more than 8.6 million subscribers migrated to digital from analog. Given that digital homes now represent 65% of our total households, our ratings are increasingly dependent on quality program. I'm pleased that despite this digital migration, we were able to maintain our ratings and in addition saw large increases in viewership for some of our signature programming, particularly with younger viewers.

For example, ratings for our Red Carpet pre-show coverage at the Golden Globes Academy Awards and Grammy Awards were up in average of 33% in households and 50% in women 18 to 34 and 18 to 49 compared to 2006. Ratings for our series Idol Tonight are thus far up 67% in households year-to-year and up 200% with the 18 to 34 demographic.

Also at TV Guide Channel, as you probably are aware, we recently announced that popular TV host, actress and fashion entrepreneur, Lisa Rinna has signed an exclusive multi-year contract to host the network's signature Red Carpet pre-shows. The Filmmaker Red Carpet hosting debut due at the Emmy Awards in September. We are extremely excited about the blend of charisma, experience and energy that Lisa will bring to our Red Carpet programming.

We're continuing to expand our hours of original programming into approve upon our program lineup. Among the planned new programs is one that represents our most ambitious new series to date, America's Next Producer, a reality competition series to be produced by Magical Elves, the highly regarded producers are Bravo's top rated Project Runway and Top Chef. This new show premiere is in July.

TVG Network, our horseracing network had another good quarter in Q1, increasing revenues by 10% over the prior year. Just this week, we announced that TVG is now available in nearly 26 million homes, thanks to our recently amended distribution agreement with DIRECTV. That expands the scope and duration of DIREC's carriage.

TVG remains the only horseracing network available to DIRECTV's customers, and this agreement further strengthen TVG's position as the most widely distributed horseracing network in the world.

At TV Guide Online, tvguide.com delivered 4.6 million unique users in January, the highest ever for the site and our average uniques for the quarter were up 33% year-over-year.

As we are looking at ways to continue to increase traffic and to improve advertising revenues across our network of online sites, we had an important product launch in April. Our Online Video Guide was developed to provide consumers a quick and easy way to access, search and browse the wide range of professional and high quality independent video content currently available on the Internet.

Our search and browse mechanism is distinguished from others in the market by its ability to provide highly relevant search results for TV shows, movies and celebrities.

Let me turn now to TV Guide magazine. We saw continued declines in our losses, as well as improvement on the advertising front. We have continued to deliver on our rate base and we have continued to add new subscribers to the magazine, many of them in a younger demographic category.

I am pleased with the current look and feel of the magazine, as it is evolve to become an increasingly more vibrant and engaging. In terms of our cross-platform integration our magazine staff is making important contributions to our new breaking news initiatives.

This initiative is a key cross-platform effort that we launched recently, the hardest of vast editorial resources from across the company, to break new stories first at tv.guide.com with additional coverage in the magazine and on TV Guide channel.

Turning to our IPG businesses, we had another excellent quarter with 26% increase in revenues. This increase was largely driven by the expansion of our patent license agreements internationally and to new platforms. In fact, yesterday we announced another such licensee, our first patent license agreement with the Telco video provider, Verizon for its FiOS TV service.

As I mentioned earlier, we acquired Aptiv Digital at the end of Q1. This acquisition brings to the company high quality products in the IPG space along with the talented team of developers that will TV Guide as we work towards the advancement of our next generation guidance products and services.

And finally I want to spend a few minutes talking about the announcement we made morning related to the introduction of My TV Guide. The debut of My TV Guide is an important step forward for the company.

As you know, I have been talking for sometime about our strategic mission to be the leading provider of global cross-platform video guidance, enabling consumers to maximize their entertainment experience. The tools and services of My TV Guide are designed to just that.

Working with operators, CE manufacturers and other distributors we will help to deliver its consumers a personalized guidance experience with entertaining and formative content about their favorite shows and stars, along with relevant program recommendations.

My TV Guide is a suite of personalized cross-platform guidance services designed to compliment current interactive program guide offerings. These services will enable the delivery of personalized guidance in an integrated fashion across TV, the Web and mobile platforms. The initial phases of development of these products will take place on the web.

We are working with distributors across cable, satellite, telco, CE and mobile and have already announced agreements to collaborate on My TV Guide web applications with companies like Verizon, EchoStar, SubLink and Direct TV.

From our research, we know there is a need on part of consumers to cut through the clutter that exists in the entertainment landscape today. Rapidly expanding channel and platform choices and explosion of content makes finding what interest individual more and more difficult. The tools and services of My TV Guide are designed specifically to address this need.

Through these services, consumers will be able to focus on this specific programs and interest the most, get relevant recommendations and manage their viewing options at anytime and from any place. We expect in the long-term to generate revenues from this initiative through licensing fees, advertising and commerce opportunities.

With assets that set us apart from other companies, TV Guide hold the unique place in the media landscape that positions us well to deliver on an initiative such as My TV Guide. We have a trusted and respected brand, long standing relationships with the broad range of distributors, wealth of original content and data and a record as the innovators in the guidance space.

Working with our partners, we’re enthusiastic about the prospects of helping to deliver the best-personalized guidance solutions for consumers of entertainment across very platforms.

In conclusion, it is a productive and exciting time at the company. We have a clearly defined strategy and we are beginning to deliver on it. All of our employees are energized by our recent accomplishments and we are also well prepared to continue the hard work that is necessary, to put is in a position of prosper in this fast paced, constantly evolving media business.

I will now turn it over to Bedi.

Bedi Singh

Thanks Rich. As Rich discussed this past quarter we made significant progress in a number of our businesses. This along with other developments, I will discuss in a moment, helped produce a solid financial performance in our first quarter of 2007.

Consolidated revenue for the first quarter increased 9% to $157 million. Adjusted EBITDA on a consolidated basis increased to over $51 million compared with $16 million in Q1'06.

Operating income for Q1 was $42 million, up fivefold million compared with Q1'06. Net income was up approximately fourfold to $34 million and for Q1 we recorded earnings per share of $0.08 versus $0.02 in Q1'06.

We also generated $8 million in positive cash flow from operations in Q1 compared with $29 million in Q1'06.

During the first quarter of 2007, income from continuing operations before income taxes increased by $36 million. However, our net cash from operations decreased, because in Q1'06 we received $52.4 million in income tax refunds where there were no such large refunds in Q1'07.

As we announced a few weeks ago and as detailed in our earnings release, we are now reporting segment information in three new reportable business segments, which are Guidance Technology and Solutions, Media Networks, and Publishing.

The Guidance Technology and Solutions segment consists of IPG patent licensing, cable and satellite providers, consumer electronics manufacturers, set-top box manufacturers and interactive television software providers. It also includes patent licensing with program guide providers in the online personnel computer and mobile phone businesses.

Additionally this segment includes company developed IPG Products and Services, for cable and satellite providers, CE manufacturers, and mobile phone carriers as well as our VCR Plus products.

The Media network segment includes TV Guide Channel, TVG Network, our horse racing channel, Online Networks including TVGuide.com, our VOD service TV Guide Spot, and TV Guide Mobile Entertainment.

The Publishing segment consists primarily of TV Guide Magazine. In addition we report Cross-Platform Costs, which include our Product Development and Technology Group, our Corporate Marketing Group and Corporate G&A Functions such as finance, legal and IP.

I'll be discussing segment information for Q1'07 in this new format. To assist with historical comparison we've included our reclassified quarterly segment results for fiscal '05 and '06 in a table contained in today's earnings release.

For the Guidance Technology and Solutions segment, which represented 48% of consolidated revenue in Q1, revenues were up 26% to $75 million. This growth was primarily driven by revenue increases of 53% from IPG Patent Licensing and 37% from IPG Products and services.

The significant Q-on-Q growth for IPG Patent Licensing came from the impact of patent license agreements entered into the second half of '06 with BSkyB and Yahoo and from an increasing digital subscribers of our U.S. cable and satellite licensees. The increase also included a $6.5 million catch up payment for certain previously unreported IPGs deployed by a licensee from the second quarter of 2004 through the fourth quarter of 2006.

Strong growth in IPG products and services was mainly driven by increases in CE product shipments by Panasonic and by increases in North American Digital households using our IPG product. But Q1 '07 did not include any revenues from our recent acquisition of Aptiv Digital but going forward these will be included beginning in Q2.

VCR Plus revenues declined 24% due to anticipated reductions in units shipped incorporating this technology partially mitigated by catch up revenue from two manufacturers with whom we reached an agreement in the first quarter of 2007.

Looking at the operating expenses for this segment, we continue to benefit from reduced costs under the new unified IPG organizational structure but had slightly higher legal expenses associated with patent litigation. That said, the guidance technology in solutions segment increased adjusted EBITDA by 34% to $54 million including approximately $7 million in partly catch up payments.

Our media network segment reported revenues of $48 million for Q1, which was 30% of our consolidated revenues. TVG network our horseracing channel had a good quarter with a revenue increase of 10% versus Q1 '06. Domestic distribution increased 13%, the number of average active wagering accounts was up and handle increased 15% Q-over-Q. We saw strong handle growth in each wagering market including two of our larger markets, Kentucky and California.

TV Guide Channel revenue although up sequentially 5% versus Q4 '06 saw a 5% decrease versus Q1 '06 primarily from a decline in advertising revenues. Distribution reached an average of 80 million households in Q1 '07 up 4%. Of this total the number of digital households was 52 million and at the end of Q1 represented almost 65% of our total households.

Original programming hours of the channel were up 45% versus Q1 '06. Ratings remained inline with prior year, in spite of the continued shift from analog to digital viewers that Rich noted earlier. This past quarter, we saw an expansion in our base of conventional advertisers for prime time. However this growth was offset by softness in the volume of program promotion advertising and somewhat reduced long form in commercial rates.

Having said that we continue to expect moderate revenue growth in this business for the full year. Online networks which consists of tvguide.com as well as a number of smaller recently acquired websites continuous to make good operational progress as Rich indicated. Revenues for Q1 were $2 million slightly lower than Q1 '06 due to advertising softness.

Until, we achieve more significant scale for the online network through either organic or acquired growth, it is clear that advertising will remain a challenge for us in this dynamic and highly competitive marketplace. While our competitive set is also growing its unique users we remain focused on delivering a differentiator consumer guidance experience, which we believe can be appropriately monetized.

This segment adjusted EBITDA increased 26% to $9 million in Q1. This positive outcome was primarily due to the timing of marketing and promotional expenses related to new program launches the TV Guide channel that occurred in the first quarter of 2006 but for '07 our plan for later in the year.

Turning to TV Guide magazine, we are pleased with the Q1 financial progress as ad paging increased 35% and ad revenues were up 18%, these increases were largely driven by additional new conventional advertisers as compared to Q1 of '06.

During this past quarter, the magazine reduced operating expenses, which led to a negative adjusted EBITDA of $6 million versus a negative EBITDA of $14 million in Q1 '06. However, we do expect to see higher expenses later this year related to planned marketing and subscriber acquisitions efforts.

Additionally, we have seen lower rates of quarter-over-quarter advertising growth going forward as the print advertising market overall continues to remain very challenging.

Consistent with what we have previously stated, we still anticipate a loss range of $30 million to $35 million for the full-year. Moving on to Cross Platform cost. Negative adjusted EBITDA was $6 million compared with negative adjusted EBITDA of $18 million in Q1'07.

This was largely due to the reversal of $10.7 million and accrued liabilities under the Henry Yuen, Patent Rights Agreement. My TV Guide product and service being develop by our product development and technology group are being rolled out later this year and for fiscal 2000 we continue to expect to incur a total of $19 million in expenses.

Significantly higher expenses are expected in the second half of this year related to the launch of Cross Platform marketing initiatives. And as I noted in our 2006 year-end call we expect total cost for our corporate marketing group in fiscal '07 in the range of $15 million to $20 million.

In addition, we plan to make companywide capital expenditures totaling $28 million to $32 million for fiscal 2007.
So to summarize, we delivered another solid quarter with consolidated revenue up 9% and adjusted EBITDA up more than threefold. Our fifth consecutive quarter with strong EBITDA performance.

Although, we had $51 million in adjusted EBITDA in Q1 this should clearly not be taken as a run rate for the full year, as it was positively impacted by the following one. Approximately $7 million associated with catch-up payments in our Guidance and Technology Solutions segment.

Secondly, the reversal of $10.7 million in accrued liabilities and corporate G&A and thirdly, lower corporate marketing expenses in Q1 and we anticipate for the remainder of the year as we plan to roll out marketing initiatives in the second half of the year.

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

Robert Carl

Thanks very much Rich and thank you, Bedi. We will ask the attending operator to please advise our telephone listeners how they can enter the Q for questions and then we will begin to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alan Gould with Bleichroeder. Please proceed.

Alan Gould - Natexis Bleichroeder

Thank you. Rob, I was wondering if you can give us the number of domestic cable and satellite technology licensees, licenses and the international number that doesn’t seem to be in the press release this quarter.

Robert Carl

Alan that’s a good question. This quarter we decided that because of the way the business is changing with the new segmentation that those numbers are becoming less and less prominent, because of the way that the deals are structured and that the number of licenses that we have in place, that are along the lines of all you can eat and also aren’t really household dependant.

Alan Gould - Natexis Bleichroeder

Okay. And with one question for you. When I listened into the Comcast walking at their presentation the other day, it seems to be a lot of competition for the sweet spot that you are going for, you are the online IPG guide, navigation getting to VOD. What are you seeing on a competitive front in terms of all these new projects?

Robert Carl

Sure. Thanks Al. Well clearly it’s a competitive space, I mean, I think obviously it’s an area that people realize is interesting and fertile. I think for us, a couple of things, one, we believe we have a very unique set of assets that make us, you know we believe the best and most well suited Q2 great offerings around this space.

So, we believe that is going to serve us very well going forward. Secondly, you know we are also very open and have shown that we are very open to partnering and offering solutions to a number of different providers and players, so if other folks are also working on offers in this area, we think there is some unique things, we offer the company that can help them in their efforts. So you know for us, I think the more interest in this area; there is most excitement for us as a company.

Alan Gould - Natexis Bleichroeder

Okay. Thank you.

Operator

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

April Horace - Janco Partners

Hi, good afternoon everybody. A couple of quick questions on Aptiv and Verizon. Buying Aptiv, does that get your foot in the door with Time-Warner and could you get your foot in the door even more so because Time-Warner roll out of Maestro has not been deemed as it’s success. And then two, with respect to Verizon, will you receive a higher licensing fee from a Verizon versus what you might get from a dish or DirecTV?

Robert Carl

On the first one Aptiv does have a relationship with Time-Warner and has had a good relationship with them. So, obviously we already have a relationship with them as well. So, the nice thing with Aptiv is it’s going to expand upon our relationship, I’m not very comfortable speaking about how it will progress in the future, but certainly for us, the fact that they are working with Time-Warner is obviously good going for us.

In terms of Verizon, I can’t comment on specifics of the deal. I can certainly say we’ll generate incremental revenues for the company, but I’m not obviously comfortable releasing how the rates relate to other providers.

April Horace - Janco Partners

So, just make sure I understand, if Verizon stills a Comcast subscriber that will be all incremental new revenue because Comcast pays a flat fee, correct?

Robert Carl

Yeah.

Rich Battista

Verizon, when they had subscribers will be incremental revenue to us under the Verizon deal.

April Horace - Janco Partners

And do you foresee your UN conversations with other Kelco’s (ph) that are looking to go into video initiatives?

Rich Battista

We are always in conversations actually on a worldwide basis with folks in that arena, so sure.

April Horace - Janco Partners

Do, you think we’ll see any mew licensing agreements from Kelco’s and Internet folks during the remainder of the year?

Rich Battista

I am not prepared to say that, quite that, I am not prepared to get any raw visibility there. I think I am obviously comfortable saying that we are in talks with folks that I can’t comment any further than that.

April Horace - Janco Partners

Okay. That’s great. And I appreciate the new disclosure.

Rich Battista

Thanks a lot. Thank you.

Operator

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

Abhijit Chakrabortti - J.P. Morgan

Hi, this is Abhijit, actually stepping it for Barton. Just a question regarding your guidance for magazine add revenues. I think you said that, you see a lower rate of quarter-over-quarter advertising growth going forward. I am not quite sure I understood that exactly.

Do, you mean that the rate of decline, I mean first quarter revenues actually decline over the fourth quarter do you see that motivating, or just wanted to?

Rich Battista

What I said was I think was an advertising revenue was up 18% quarter-on-quarter. And that we don't expect to see that same level of growth in the rest of the year, when we look at the quarters that are coming up, because the add market generally for print is extremely challenge right now.

Abhijit Chakrabortti - J.P. Morgan

Okay all right. And secondly I was just wondering, if you could help us clarify exactly what kind of revenue impact do you expect to see from My TV Guide initiative, is it going to be something incremental over the existing IPG license fees you receive?

Rich Battista

Certainly, the concept on My TV Guide is to generate some incremental revenues for the company on a long-term basis. As I’ve said I think a few times before, we don't expect material revenue increases in the next couple of years.

But certainly over the next five year time period we believe we will see incremental revenues and it’s a mix of revenues both from existing customers and new customers, both domestically and internationally, some could be AlaCart (ph) solutions we offer people, other folks may take integrated fall on one solution clearly affiliate license fees or commerce and advertising as I said, we think are some of the key revenues sources there.

Abhijit Chakrabortti - J.P. Morgan

Okay, great. Thank you very much.

Rich Battista

Yeah.

Operator

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

Todd Mitchell - Kaufman Brothers

Yes, if I could actually just follow-up on that last question. I guess how do we think about the business model here and should what we do is basically layer this on top of an existing sub-base and make some assumptions in terms of the level of penetration for the menu and some kind of ASP for each of the items of the menu.

Rich Battista

Yeah, I mean, I think generally that’s probably the way to look at it. This is clearly a separate discrete product beyond the IPG that we will offer to service providers. So, we see it as a separate potential revenue stream with the new offering.

So, I think that’s obviously one way to look at it and of course consumer electronics manufacturers as well were looking at working with them on the same basis. But we also believe that advertising will be a quite an interesting piece of this as well. So that’s another piece of the puzzle.

Todd Mitchell - Kaufman Brothers

So if I could follow up on that. Is it fair to assume that, well I guess one, just from a technology standpoint, this is to be licensed to the service provider, but at the same time this is to be available or elements to available online. Will it be something that a user can transfer from one service provider to another service provider? And two, do you have -- I am assuming you have access to advertising revenue within the offering?

Rich Battista

The intention of this isn’t to have someone have to be able to use it from one service provider to another. The idea is to have a integrated opportunity with the service provider you business with. So if you are in business with a cable operator, the idea that you could manage you’re my TV Guide or my cable operator features, I mean, integrated way across different platforms.

So, for instance, if you, I mean remote recording are the great example of it. The idea that you could be online or will have a mobile phone and it can speak to you or set-top box at home or lets say you wanted to create a customized green setting, you could do it from the website and then when you get home that night you watch television, it’s set at your home TV as well. So the idea is to have it integrated across your service provider and how that help you be able to do that.

Todd Mitchell - Kaufman Brothers

Okay.

Rich Battista

I am not sure what the advertising question was?

Todd Mitchell - Kaufman Brothers

Well, just basically, as I understand it now with the current IPGs the advertising is at the behest of the service provider. You get to cut it if they decide to do it, but I am assuming in this instance there will be places where the inventory is wholly yours?

Rich Battista

Yes. Well, just to clarify that if people take the iGuide, which is our product, they have to take the advertising. For people who take our license like some the satellite folks, they don’t have to take the advertising, it’s their election, just to clarify that. But, you know, the idea is that this would absolutely be incremental advertising revenue because it would be completely separate inventory in a separate section of the guide experience.

Todd Mitchell - Kaufman Brothers

Okay. Thank you very much.

Rich Battista

Thank you Todd.

Robert Carl

Operator, it looks like that’s the end of our question queue. If you could let our listeners know how they can listen to a replay of this call.

Operator

Ladies and gentlemen, the host is making today’s conference available for replay, which should be hosted for one week, following the conclusion of this call. To access the replay, call 888-286-8010 domestic or 617-801-6888 international. The conference ID number is 53134204.

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 your investor conference call. Thank you very much for your participation. You may now disconnect.

Rich Battista

Thank you everybody for joining us we look forward to seeing you again on our next conference call.

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