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Executives

Ann Parker – Director, Investor Relations

Scott Petersen – Chairman and CEO

Frank Elsenbast – Senior Vice President and CFO

Analysts

Justin Ruiss – Sidoti

Travis Goff – Goff Capital

Michael Kupinski – Noble Financial

Varkey Chacko – CCI Llc

John Koerber – Bennett Management

LodgeNet Interactive Corporation (OTC:LNET) Q4 2011 Earnings Call February 22, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined the LodgeNet Interactive Corporation Q4 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer section, and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference may be recorded. I would now like to turn the call over to your host, the 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 fourth quarter and full year [2001] conference call. You should have received copies of our earnings release, if not, please call me at 605-988-1000. 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 Frank Elsenbast, our Senior Vice President and CFO. Scott and Frank will review our fourth quarter and full year 2011 earnings, and we’ll 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 to today’s comments and they can found under the Investors 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. 2011 was a transformational year for LodgeNet. Our success and transformation was evidenced at three levels. First, we launched several strategic growth initiatives during the year. We announced our new Four Screen strategy at our annual Customer Technology Symposium in October, which articulates a clear path for growth beyond our traditional business.

With this strategy, we are definitively moving beyond the hotel guest room, provide an expanded array of solutions and services to hotels and travelers, whether they be in the room, on the property or on the way. And in support of our Four Screen strategy, we released Envision, our new cloud-connected interactive television platform. At year end hotel adoption was accelerating.

Yesterday, we just announced the 7,100-room Venetian Resort-Hotel of Casino, Las Vegas. It’s moving to Envision and I’m pleased to report our total contracted Envision room just passed the 60,000-room level with the Omni Hotels announcement we made today. That’s 20,000 additional rooms in the last month and a half. So we’re looking forward to a very strong year in 2012 for Envision.

And we also recently launched our Mobile App, which in one level turns a guest’s iPhone or iPad into a powerful guest remote control. But more importantly creates for the first time a one-to-one marketing relationship for us with consumers and travelers, and the opportunity to deliver additional services to our hotel partners. And in the fourth quarter, our installation rate for high-definition interactive TV platform accelerated to 15,000 rooms, taking our base over the 300,000-room milestone.

Second, our transformation was evidenced by an increase in the revenue we generated on a per room basis. For the second straight quarter, this important metric was up and this is the first time since 2007 the hospitality revenues per room were up year-over-year, and these increases are a direct result our strategy to diversify our revenue base by selling more to our core customers and generate a new revenues from advertising-based services.

And lastly, our transformation is being reflected in our profitability metrics, which improves substantially during the year. Operating income was up 22% over 2011, excuse me, 2010 and our net to common improved 65% from a negative $0.71 in 2010 to a loss of only $0.25 per share this past year.

After Frank covers the details of our financial results during the quarter, I’ll give you some additional thoughts on how our highly attractive market position and a proven path for growth opportunities we have before us. Frank?

Frank Elsenbast

Thanks, Scott. Our fourth quarter operating results met or exceeded our guidance on revenue, adjusted operating cash flow and earnings per share. And we entered 2012 a much stronger company with a more diversified revenue base, a deleveraged balance sheet and established growth programs.

Starting on slide number four, I will take you to the slides which detail the financial results for the quarter and full year 2011.

Revenue for the full year was $421 million, which was a 7% decline versus prior year. We continue to diversify our revenue base with our diversification initiatives growing 3% in 2011. Our healthcare business grew at 21% for the year as they added 12 new facilities and ended the year with nearly 16,000 beds, an increase of 30% over last year.

System Sales & Related also grew nicely with 13% sales growth over 2010, due in part to higher sales of equipment and related programming.

In the fourth quarter, our diversification efforts hit a milestone as we delivered the majority of our revenue from diversification initiatives for the first time in company history. We are pleased with the continued growth of these initiatives as our customers expand the number of products they purchase from LodgeNet.

On slide number five, we have provided the current composition of our room base. We ended the year serving just under 1.5 million guest entertainment rooms. This is a reduction of about 200,000 rooms during 2011 and I’d like to spend a few minutes discussing the characteristics of these rooms and what we expect for 2012.

As we have said throughout the year, these rooms are much less productive than our average rooms, for the year these rooms generated 35% less revenue per room than our average. A few additional items about these rooms.

The 2011 room loss was exasperated by the loss of 50,000 rooms in a single lower scale hotel chain, which did not perform at our HD revenue threshold and would have required additional capital investment by the hotel, which we was willing to make. 80% of these rooms generated less than $10 per room per month and only 3% of these rooms were $15 per room or higher.

These rooms generally with HD install did not go to another interactive TV provider, but opted for now to only provide cable TV programming for their guests. We feel many of these hotels may reconsider LodgeNet partnership in the future as we continue to introduce new innovative products such as our new Mobile App and drive down the overall cost per room.

As we look forward into 2012 and beyond, we expect to see the following trends within our room base. First, our market share will remain very strong. We will continue to maintain a very high market share of VOD served rooms and the room base will be concentrated in the upper chain scales with over 75% of our room base being in the higher chain scales or upper end independent properties.

Second, we will remain disciplined in our approach. We expect to see one more year of slightly elevated attrition in 2012 as the economy and midscale sectors may elect to shift to only providing cable TV programming to their guests. We expect that our room base will stabilize considerably during 2012 and we will end the year with approximately 1.4 million guest entertainment rooms.

And finally, we have an attractive and sizable target market. We see our addressable market as the higher end chain scales, select midscale properties, the attractive gaming sector and higher end independent hotels.

This group represents approximately 2.2 million great hotel rooms in the U.S. and Canada, and we currently serve only two-thirds of that base. We feel this room base represents a very large and affluent market segment that is positioned to benefit from the services provided by LodgeNet as the industry leader.

Revenue per room performance for the fourth quarter and full year is provided on slide six and seven. The Q4 revenue per room performance of $21.35 is an improvement of 3.4% over last year. This was our strongest comp in several years.

The significant growth of our diversification initiatives more than offset the decline in our Guest Entertainment business. This is the second quarter in a row where our hospitality revenue per room has improved versus prior year.

In the fourth quarter hotel services, system sales and advertising services all showed considerable growth versus last year and grew at a combined rate of nearly 15%. With a strong performance in the second half of 2011, revenue per room improved on a full year basis to $21.36, a modest improvement over the $21.29 reported in 2010.

The full year detail is provided on slide number seven and I would like to highlight a few points by specific product lines. Hotel services revenue per room increased 7.4%, driven by growth in our television programming revenue as we increase the number of rooms receiving larger packages of high-definition programming and general pricing increases versus prior year.

In addition, we recorded our first revenues from our Envision Apps subscriptions this year. While the revenue is still very small, it is growing and these Envision revenues represent a high margin, software as a service opportunity, which should increase our overall gross margin and reduce revenue volatility.

Revenue per room from system sales and related was up 21.8% from increasing sales of HDTV equipment, higher revenues from network design services provided to hotels and fees related to a contract termination in 2011.

Advertising revenue per room increased by nearly 11% for the full year driven by a higher server-based advertising and an overall increase in channel leasing activity as a growing group of advertisers and programmers purchased carriage on our systems in 2011.

In addition to improving revenue per room, we also delivered higher operating profit per room. On slide number eight, you see the AOCF per room of $5.29 increase by 3% for the full year as we maintain our gross margin and controlled our costs. High-definition -- during 2011 we saw continued strong performance from our high-definition room base.

On slide number nine, we have outlined the outlined the revenue per room performance versus our analog base. Revenue per room was up over 60% in HD rooms driven by nearly 60% higher guest entertainment revenue and TV programming running 75% higher.

For the quarter, we added over 15,000 high-definition rooms. This was our largest quarter during the year bringing our current HD-room count to 309,000 or 21% of our guest entertainment room base.

The HD capital cost per room, which is provided on slide number 10, declined in 2011 to $140 per room, which is a 50% reduction versus the cost per room in 2009. As we continue to benefit from lower technology costs we are able to provide HD upgrades to an increasing number of our hotel partners.

We expect the level of HD installation activity to accelerate to 100,000 rooms in 2012 as many of the major brands are focused on improving the guest experience and delivering the same quality of programming that consumers have come to expect from their home entertainment systems.

Gross margins for 2011 remain very strong at 43.7% with solid performance across all of our business lines. Guest Entertainment margin remains above 60% consistent with 2010 performance. Hotel Services margin improved 360 basis points due to the improving profitability of our TV programming business as long-term contracts have been renewed under more favorable market rate terms. System Sales & Related margins improved to nearly 37% due to improved margins on equipment sales and higher contract fees.

Our Advertising business performed at nearly 49% gross margin with a strong performance from high margin server-based advertising and carriage fees. And finally, healthcare operated at over 50% gross margin while growing the topline revenue 21%.

The margin performance of all of our business lines is an indication of the strength of our market position and the product offerings as we have been able to maintain and improve margins in a challenging economic time, while we are were also rapidly diversifying the revenue mix of our business.

On slide number 12 is a summary of our operating expenses for the fourth quarter and full year 2011. The company continues to aggressively manage expenses while also investing in the critical growth areas of our business. The 11% reduction in operating expenses was driven by headcount reductions, reduced property taxes and repair costs, as well as a broad base focus on reducing discretionary spending.

Operating scale is an ongoing financial advantage for the company, as we continue to find more efficient ways to operate our base business significant savings are generated. These savings can either be reinvested into growth areas or improve our bottom line performance.

During 2011, LodgeNet invested significantly in product development, as we successfully brought to market our Mobile and Envision Apps. These investments are already starting to pay dividends as we have over 60,000 Envision rooms under contract and launched our Mobile App in over 500,000 rooms last month.

Adjusted operating cash flow for the quarter was $22.7 million, which was within our Q4 guidance range. For the full year the company delivered $104.1 million of AOCF

On slide number 13, you will see the trend for our trailing 12-month AOCF performance for the past five quarters. You will notice that over this time period, the company has improved operating margins as we have diversified revenues and executed on our growth initiatives.

Slide number 14, details the continued improvement on bottom line profitability with a 22% improvement in operating income during 2011. On a per share basis, the improvement versus last year is 65% as the company narrowed its per share loss to $0.25 per share. For the fourth quarter our per share loss was $0.01, well above our Q4 guidance of a loss of $0.08 to $0.20 per you share.

This favorability was due in part to a $3.3 million Canadian tax benefit. The continued profitability of our Canadian operations allowed the company to recognize a portion of the company’s net operating loss tax assets.

Free cash flow for the full year is outlined on slide number 15. The company continues to generate significant cash flow that will support our capital investment programs as we upgrade our room base to HD, as well as continuing to pay down debt and fund all preferred stock dividends.

For 2011, we generated nearly $25 million in free cash flow. This performance was negatively impacted by working capital changes as we returned many of our vendors to more traditional payment terms. When adjusted for changes in working capital, free cash flow for 2011 was $45 million or $1.11 per share on an as converted basis.

On slide number 16 we have laid out the specifics of our debt reduction and covenant compliance. The company ended 2011 with under $350 million in net debt, a reduction of $100 million over the last two years. Our leverage ratio at year end was 3.43, well below our current leverage covenant of 4.0. With the current de-levering that has taken place, we now have more flexibility to invest in our strategic growth initiative in 2012.

I will conclude with our guidance for 2012, which is provided on slide number 17. This year, we will be providing annual financial guidance with additional guidance on key operating metrics.

For 2012, the company expects to report annual revenue in the range of $415 million to $430 million. Adjusted operating cash flow is expected to be in the range of $95 million to $100 million on a full year basis. And we expect to be profitable on a full year basis with net income available to common shareholders to be in the range of a positive $0.01 per share to a positive $0.20 per common share.

Moving onto our key metrics guidance, we expect hospitality revenue per room to continue to improve. We ended 2011 with two quarters of year-on-year growth and see that trend continuing in 2012. On a full year basis, we expect hospitality revenue per room to increase by approximately 5%. Continued improvement in our theatrical movie revenue and another year of double-digit growth in our diversification initiatives will both contribute to the 2012 improvement.

As I mentioned earlier, our room base ended this year with 1.47 million guest entertainment rooms as we continue to concentrate in the upper chain scales and higher end independence. We believe this trend may continue for another year although at a much reduced rate. We expect to end 2012 at approximately 1.4 million guest entertainment rooms.

HD rooms ended the year at 309,000 and we expect to install 100,000 rooms with HD functionality in 2012 as hotels get serious about upgrading their in-room media systems and want to benefits from the power of our new Envision platform and our Mobile App. These upgrades represent a great investment opportunity for LodgeNet as these rooms deliver higher revenue per room.

Envision installed rooms are expected to grow from the installed room base of 18,500 to 130,000 rooms by the end of 2012, as hotels continue to embrace the new functionality of our Envision platform. We would like to -- we would expect that approximately one-third of these rooms will subscribe to our premium apps.

The Mobile App footprint, we’ve launched with over 500,000 rooms will continue to build in 2012 as our hotels and travelers continue to discover this unique app. We expect to end the year with three quarters of million rooms mobile enabled to.

We will provide quarterly updates for these metrics during 2012. It is our belief that these are the initiatives that will drive much of the future value creation for LodgeNet as the company continues to diversify its revenue base and enhance the services provided to the hospitality and healthcare businesses, and the consumers they serve.

With that, I will turn the call back to Scott.

Scott Petersen

Thanks, Frank. That was a lot of great data. As I indicated before going to questions, I’d like to give you a couple of thoughts regarding our highly attractive market position and a proven path for growth opportunity that we see before us.

On slide 18 you’ll see some of the data points that create a very valuable and highly attractive market position. We have a dominant position with an 85% share of the VOD market. We have the best screen and best entertainment options, which will only be enhanced as hotels transition to our high-definition television platform. We offer premium VOD content, which is the earliest window outside the theaters and that makes us the fifth most viewed channel in hotel rooms when you consider viewership of VOD.

And we have a very affluent consumer demographic with a strong reach touching over 500 million consumers each year and those consumers are highly interactive, you will note that data points on the bottom of that slide, 98% of guest turn on the television, 60% now are going interactive with our new Envision platform and 75% of all travelers are carrying smart devices.

And those consumers are impressively affluent and educated. With significant, two times more likely to have household income over $1 million -- $100,000 per year and considerably more educated than the average American. So our strategy is to not only broaden our hotel relationships but also to get closer to the consumer and tap into the revenue streams that flow from that.

Our new fourth stream strategy is articulated on slide 19, we believe this new expanded mission is and will drive growth for our company in 2012 and beyond. Historical, our focus has been on the television within the guest room and we have provided the best and widest array of content by any company within our industry.

However, technology is changing and it is creating new opportunities for us. We are no longer tethered to the television nor just the guest room. We can connect and inform and entertain guests regardless of what screen are viewing and regardless of where they are at.

So now our traveler touch points are the big screen interactive television, the laptop, the smartphone and the tablet, and we can do that while the consumers in the room, on the hotel property or while they are on their way.

And with this change we are in a much more strategic position with hotels and brands because our interact systems, with the interactive systems they can create content once and publish it to whatever screen the guest is using at the time.

Our proven path of growth opportunities are summarized on slide 20. They are the continued transition to our higher revenue high-definition television platform, as Frank indicated only 20% of our rooms are fully high-def today, so we have an 80% opportunity directly ahead of us.

Envision, our new HD software platform is driving greater guest engagement and new revenue streams which I will show in the next slide and hotel adoption is accelerating. We started 20,000 rooms during the first three quarters of last year, we doubled that during the fourth quarter as we reached 40,000 rooms by the end of the fourth quarter and today we’re pleased to announce we just passed 60,000 rooms with the Venetian and Omni Hotel announcements we made yesterday and today.

Second is our recently released Mobile App which creates an over the top relationship with travelers. We’re looking to drive new revenues with increased guest engagement with the interactive television, from new revenues from hotels as they subscribe for enhanced mobile services, such as making it possible for a guest to check out of their room on their mobile device and that can even be after they left the property or order room service by the pool or on the way back to the hotel once again for smart device.

Now with the Mobile App we are creating for the first time a one-to-one marketing relationship with the consumer where they’re driving incremental revenues from promotional campaigns or from transactional revenue such as ticket purchases or restaurant reservations.

Third, we believe targeted and interactive advertising represents a meaningful opportunity for growth by expanding, what I would call the third leg of our revenue stool, generating revenue from third-parties based on the high-valued demographics the consumer on the rooms and those using our new Mobile App. Of course, healthcare continues to represent a very attractive growth opportunity for us by leveraging our core technologies.

So we believe our Four Screen services will drive revenue growth as illustrated on slide 21. Frank had already reviewed the increase in revenues we earned when we operated analog rooms through our high-definition platform, which is again illustrated by the left and center bars on that chart and our Four Screen strategies will add additional elements our revenue stock as it illustrated by the 25% increase of the right bar.

So this new revenues coming from Envision Apps as hotel subscriber for advanced services from our Mobile App which has similar hotel subscription revenue opportunities along with guest transactional revenue shares and also from advertising services, whether it be on the television, the mobile device or the web platform. And these new services come at a very high margin with minimal incremental CapEx as is illustrated on slide 22.

Envision after basically a software as a service offering, so this represents a higher margin new product line for us, a mobile is basically a software implementation where we do a software upgrade to our interactive television system and guest access the app by software download to their smartphones and tablets. And our approach to advertising is based on the low fixed cost operating model as we leverage our existing interactive television and mobile platforms.

So, you will see that while we’re looking to drive incremental 25% increase in revenue, our cash flow growth will exceed over 30%, so we believe our Four Screen strategy has repositioned LodgeNet for solid revenue and cash flow growth in 2012 and beyond.

Before closing, I just wanted to say that we’re very pleased so far with the attention our new Mobile App has gained with consumers and the press. On slide 23 you will see some of those highlights. Variety of major newspapers and television outlets carried the story. It was featured in USA Today, MSNBC.com, and CNBC television. On the bottom of the slide you will the reference to a very nice story CNBC did on the Mobile App from Venetian in Las Vegas.

The app is also featured on various travel blogs and was named App of the Week by Radio-info.com and the distribution of USA story was picked up by multiple partners and various media outlets throughout the United States. So mobile is off to a great start and we look forward to keeping you advised of the enhancements we will be making to the app and its impact on our business.

So, with that, operator, would you please explain the question -- explain the process for asking questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Michael Siren] of LodgeNet. Your line is open.

Scott Petersen

Operator, I think that was a mistake. Anything else?

Operator

Yeah, sir. We will go to the next question which comes from Justin Ruiss of Sidoti. Your line is open.

Justin Ruiss – Sidoti

Good afternoon.

Scott Petersen

Hello, Justin.

Frank Elsenbast

Hi, Justin.

Justin Ruiss – Sidoti

Congratulations.

Scott Petersen

Thank you.

Frank Elsenbast

Thank you.

Justin Ruiss – Sidoti

Sounds like everything is going in the right direction. I just wanted to go over just the room count again. It sounded like you lost some rooms and I just wanted to make sure I have the right count, so…

Frank Elsenbast

As far as the ending room count for guest entertainment that was 1,477 million. I think if you go to the press release and you go to the last page there is a rolling five quarter listing there for a table that shows you what the room counts are.

Justin Ruiss – Sidoti

Okay.

Frank Elsenbast

So when we’re looking at the guest entertainment rooms for the year, we ended 2011 at 1,477 million and then I was comparing that versus the fourth quarter number for the end of 2010, which is at far right-hand column.

So you can see we came down just a little over 200,000 rooms and then that’s kind of what I was going through in that section where could describe the attributes they are generally much lower revenue rooms, concentrated in the midscale economy and the room count is really still concentrating in the upper chain scales for better independence and in the future more so in the gaming market as well.

Justin Ruiss – Sidoti

Got you. So going forward there is still more room to cut those lower performing rooms?

Frank Elsenbast

Well, we think that there is probably still some rooms in the midscale and economy that may elect to convert from a -- their current environment where they are providing video-on-demand services, as well as free-to-guest programming that they may -- some portion of that sector may go, which is free-to-guest only.

Justin Ruiss – Sidoti

Got you. So they are cutting video on demand altogether?

Frank Elsenbast

In some cases they are electing to do that.

Justin Ruiss – Sidoti

Got you.

Frank Elsenbast

And then, a part of the reason is in the past, LodgeNet and On Command would basically put the entire bill for an upgrade to high-definition and as we have been somewhat capital constrained in the past, we have required rooms to deliver a certain amount of revenue per room to get over that threshold in order for us to invest our capital. If they are not quite there, we ask them to share in some of the capital expenses and some of the midscale properties elect to do that and others don’t.

Justin Ruiss – Sidoti

I got you.

Scott Petersen

Let me just add a point there, we recently implemented a, what we call our certified digital system. So from we are harvesting some of the platforms from the rooms that left our system this past year. We do a quality check certified as being with file server technology and that is a then a very cost effective offering for us to redeploy those assets into those types of rooms and in the past we might not have had that leftover or the ability to take already fully depreciated equipment put it back into production. So, we’re doing that and I would tell you, we have also had some in-bound calls with the Mobile App that I think adds another new dimension beyond just VOD what our system offers.

So regardless I think and what market scale we have seen a very interesting feedback from hotels saying that how do I get that Mobile App in my property and I think that might also help create a little more stickiness as far as maybe that mid market staying with the interactive platform which has VOD but also has the mobile capabilities. So I think that will also help kind of as Frank went through prior moderating some of these trends we have seen this past year.

Justin Ruiss – Sidoti

Okay. And just with the Mobile App, is advertising getting geared more towards like the end consumer or are you still trying to like kind of pitching to hotels, how is that working?

Scott Petersen

While on one level, there is a third-party advertising that is available on the Mobile App that’s a kind of well-developed a little banners that do appear as a very interesting percentage of our -- the people who download the app, do give us more information about themselves, they register with us, which gives us the ability to do more targeting knowing gender and general age groups. So we’re looking for revenues from the outsider space there primarily from third-parties.

From the hotel side, really is allowing hotels to use the power to Mobile App like to purchase that to subscribe to our, what we call M checkout, mobile checkout. So the guest can review their bill on their mobile device. They can even left the hotel, you’re going down the elevator and you see a big line for front desk, quickly pull up the app, check out your bill and checkout e-mail, e-mailing the bill through your own account and room service would be another area where hotels can subscribe to our new app.

So that’s incremental pennies per room per day that adds up into dollars per room per month at very high margins for us. So that’s how we probably would see making more revenues from the hotel side for quality services provided, advertising being more related to our third-parties.

Justin Ruiss – Sidoti

Got you. All right. That answers my question. Thank you very much and congratulations.

Scott Petersen

Thanks, Justin.

Frank Elsenbast

Thank you, Justin.

Operator

Thank you. Our next question comes from Travis Goff of Goff Capital. Your line is open.

Travis Goff – Goff Capital

Hey guys.

Scott Petersen

Hello, Travis.

Frank Elsenbast

Hey.

Travis Goff – Goff Capital

And with regard to Envision and Mobile, what types you guys breakout in the presentation the types of hotels be it luxury, upper upscale, upscale. Are you seeing adoption of these, of Envision and Mobile only from kind of the top tier hotels or are you seeing it kind of across the Board?

Scott Petersen

Well, let’s talk about Envision first. So that is a high-def opportunity, so very interesting from the standpoint. We’ve been installing high-definition now since about 2007 and of course during the great recession hotels really cut back on their capital investment programs, so that means they weren’t buying flat-panel televisions which was the fundamental requirement before we could take them to high-def.

But those in that first platform which we call high-definition advance, that is upgradable on a software-basis to the Envision platform and then enables and gives us the opportunity to generate these monthly subscription revenues for the various apps.

We are seeing the Venetian for example, that announcement, they were on that first-generation high-def platform and while we have just done the software upgrade to take them to Envision, so now we can do in-room dining over the television. Of course, it’s also capable if they would like to subscribe to the Mobile Apps so the guest could do it on both devices. I should say, both plus tablets, all three devices.

And so, I would say Envision to start out with the folks has mostly been into the upper marketplace where the movement to high-def has happened first. But we would see that spreading across kind of our entire room base over the next several years.

When it comes to Mobile, that is enabled, we’ve been able to, we turned on Mobile in over 500,000 rooms in 2,000 hotels on the last day of January and that was across basically all the rooms we’ve touched as a company, LodgeNet as a company since about 2005 or 2006.

So that was various thing, we able to take back to our early generation of platforms. In fact we’ve actually have some hotels that have two TVs are on our analog platform, but its on a software platform that we can enable with our Mobile App and our Mobile technology. So that is across to the entire a very broad cross-section of our hotel base.

And I would say, we still have, when we bought On Command, that’s coming up at about five years ago. On Command had a great room base and many of their customers have been moving, they move to high-def and then, they then moved to be fully high-def enabled LodgeNet platforms.

But we have still several, I mean a lot -- significant number of hotels, Marriott would be an example that is still residing on the On Command platform from about 2002 to 2005. Now with the Mobile and a new Envision, we’re seeing a lot of interest there kind of totally elevating the experience not only in the TV but bringing in the Mobile and the whole Four Screen approach. So that, this -- we think that also can provide a lot of incentive for hotels to make the movement this year and next. So we’re looking for very strong demand.

Travis Goff – Goff Capital

Okay. Great. And then lastly on the healthcare side, what was the fourth quarter systems installed and bed served?

Frank Elsenbast

The beds served, we ended at just under 16,000 beds, yeah, just under 16,000 beds. I think the number of installed systems was 68.

Travis Goff – Goff Capital

Okay. Great. Thanks.

Scott Petersen

Thank you.

Operator

Thank you. Our next question comes from Michael Kupinski of Noble Financial. Your line is open.

Michael Kupinski – Noble Financial

Thank you. And thanks for taking the question. I just have a couple of quick ones. Some of the metrics obviously that you seem to be showing some promising improvement and obviously you beat your guidance in the fourth quarter, but if I’m reading this right your guidance for 2012 is fairly similar to 2011, and I was just wondering what has you concerned in your guidance and where do think you may be conservative?

Scott Petersen

Yeah. Frank, why don’t you take that?

Frank Elsenbast

Sure.

Scott Petersen

You’re the expert there.

Frank Elsenbast

Hi, Michael.

Michael Kupinski – Noble Financial

Hi. How are you?

Frank Elsenbast

Good. Good. So the outlook for 2012, I guess, I’d startup saying with there is a little bit tempered because we think that there will still be some level of room loss going from just under 1.5 million down to closer to 1.4 million. So that does put a headwind on our topline revenues. We do think the revenue per room will continue to improve, so we’ve guided to a 5% improvement there and we feel good about that.

And once you do the math on that and you look at the AOCF forecasts, the other two changes really have to come within operating expenses and gross margins. So I think when you look at operating expenses and they were down 11% this year.

We are continuing to take down operating expenses in 2012 but there is also reinvestment going on which is, the initiatives of advertising as we rollout our expanded ad insertion platform, growing Mobile, growing Envision, continued product development. Those are the areas where we are investing and even though we’re taking other costs out. I think you will see an overall increase in our operating expenses in 2012.

And then I think we’ve been a little bit conservative on our expectations on margin. We had a very successful year this year as we were able to maintain an improve margins across the Board. And I think in 2012, right now we’re just being a little more conservative on that until we see exactly what the level of adoption is on Envision and then Mobile, both of those products are extremely high margin businesses but we’re at the very early stage of rolling those room basis out.

Michael Kupinski – Noble Financial

Frank, do you have a timeline when you think you’ll have the national advertising insertion platform ready to go?

Frank Elsenbast

Yeah. We would expect to light that network up in very early 2013. So 2012 is the year that we’re building out the network, installing equipments, building sales partnerships and starting relationships with advertisers.

Michael Kupinski – Noble Financial

Okay. And then in terms of the FTEs in the latest quarter, can you give me a comparison of the headcount of this quarter versus maybe year ago, maybe even the third quarter?

Frank Elsenbast

Sure. It is -- the headcount is right around -- for the company is right around 960, I believe let say 950 and the comparison to a year ago is down 8%.

Michael Kupinski – Noble Financial

Okay. Perfect. Thank you so much.

Frank Elsenbast

All right, Michael.

Scott Petersen

Thanks, Michael.

Operator

Thank you. (Operator Instructions) And our first question -- our next question comes from [Varkey Chacko of CCI Llc]. Your line is open.

Varkey Chacko – CCI Llc

Hi, Scott, Frank.

Scott Petersen

Hello, Varkey.

Varkey Chacko – CCI Llc

Part of my question was answered just now, I was looking at the revenue guidance of what $415 to $430 or so, but the EBITDA, the AOCF going down in 2012, is kind of the guidance and I heard Frank say being conservative. When in terms of your thinking does the -- does all of these improvements the high-definition and the Mobile, et cetera, start to really kick in, is it the 2013 event or when do you see this starting to move upward?

Frank Elsenbast

Yeah. Varkey, this is Frank. So when you get to the end of 2012, a few things will happen. We will have upgraded, we were forecasting 100,000 rooms to high-definition. Those operate at a higher level of revenue on Guest Entertainment and on TV programming. We will have mobile enabled rooms have three quarters of the million of those and we will have had all year to really work on the business model and monetizing that app, which has been very well received.

Same with Envision, we are significantly increasing our room base there were we get to 130,000 rooms by the end of the year and we think that there is a 30 to -- 30% plus adoption rates on hotels that will buy premium apps and pay a monthly subscription.

And then probably the biggest thing that isn’t been spoken is, in early 2013, that is when the advertising network comes online. And we’ve had that in our last few investor presentations outlining the size of that potential business where we are really transforming a business that used to be very small scale and analog based, and we’re taking it to a 500,000 plus room footprint with the ability to target at, now going to be in high-definition.

So we think -- in turning that on early in 2013 that will immediately contribute a meaningful amount of revenue and EBITDA to the overall P&L. So we are -- you do see in 2012, there is a year somewhat of transition as we build room basis in our new apps that have been very well received so far and we upgrade our private, the network for advertising which we run for many years on a smaller scale but now given the opportunity there, we’re going to expand that to 0.5 million rooms.

Varkey Chacko – CCI Llc

Okay. Well, thank you for that. And then, separately in terms of the contracts, the average maturity of the contracts, average length of the contracts, how does it look at the end of 2011 versus 2010 and where would you see that by the end of 2012?

Scott Petersen

Well, we get contract extensions primarily when we do, in today’s environment, when we are doing the upgrade to high-def. So, if there is -- if the hotel is not ready for high-def where we’ve not made the arrangements with them, the contract continues to generally move down the remaining life.

Now, that doesn’t mean we have got a lot of hotels within the contract life, that vast majority of hotels just keep a service in that goes month-to-month or goes for one year renewal or two year automatic renewal.

So the math would be that it’s a probably shortened somewhat over the past 12 months, but now as we accelerate the movement to high-def, those incremental 1,000 rooms are that will be going to high-def this next year, those are locking down than on five-year, new five-year contracts those things get pushed out.

So with the acceleration of the movement to high-def that will then serve to extend the average remaining life. But just because the contract comes down to last month, basically the hotels have all this in the world to keep the amenity for their guest, to keep generating whatever commissions that they are earning from those purchases and overall, our pitch is that it reduces the cost of your basic TV program in the $1 to $2 to $3 that we pay them for commissions on a monthly basis.

Varkey Chacko – CCI Llc

Okay. Thanks Scott. Thanks Frank.

Scott Petersen

Thanks.

Frank Elsenbast

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from John Koerber of Bennett Management. Your line is open.

John Koerber – Bennett Management

Good afternoon. My question is if you could spend an additional $15 million to improve rooms in the high-def i.e. another 100,000 rooms, would you do it or does it make more sense to pay down debt?

Frank Elsenbast

Well, I’ll tell you, here’s the math. If we spent, invested that extra $50 million that is 100,000 rooms, the average investment is, use that math is $150 per room. The slides that we just want to, we are generating $10.50 of cash flow per room per month from that investment. And of course, so that, we’re getting our money back in less than a year and a half on a five-year deal.

Now and then if you take Envision Apps or any incremental revenue streams, that chart shows that goes from $10.5 of cash flow per room per month to something like $14. So the returns there, our debt is 6.5% and the returns here are extremely strong.

So all things and of course, we have to manage our leverage ratios and all the other things that go in the overall balance sheet. But the return we are getting on these new interactive platforms is extremely attractive and for the right hotels, I would suggest it’s probably right business model to take that opportunity if it is right there in front of us.

John Koerber – Bennett Management

Okay. Well, that makes the question, should you be attempting to facilitate a greater conversion to higher def more rapidly by subsidizing that process with hotels?

Scott Petersen

Well, so the, currently the, our focus is on properties that basically are generating enough revenue, so there is very minimal capital investment required on the hotels part. So they buy the television that make there has to be installed in the room, but thereafter the properties that we are primarily focused on today require no incremental capital investment.

So I think the real, over the last couple of years the gaining factor has been more of the hotel industries, having the flat panel had made the investment in a high-definition television platform and/or kind of the brands they’ve been assessing kind of the overall technology market, during the recessionary period of time.

But just as Starwood signed up with -- the master agreement with us last September for Envision platform, the Omni announcement today that Envision, Kimpton, Joie de Vivre, our sales organization is out in front of all the major brands and we expect this year to be a much more action in the major upper end chain scales that are ready to go.

So I think its been, the gaming factor, our balance sheet is always, coming through the recession, I think we managed to look very responsibly paid down a lot of debt, kept our leverage ratios well intact. Right now, if we have with increasing demands from hotels, the near-term, our guidance really is that we are looking to invest more next year in these platforms in this past year. We did around 40,000 rooms. We are looking to take that 100,000 rooms. So we’re moving in that direction.

John Koerber – Bennett Management

Right. Let me follow up on the question that the previous gentlemen asked which is you eluded to that the EBITDA, the adjusted operating cash flow would probably increase dramatically, I didn’t mean to use the word dramatically, at the beginning of 2013 when the advertising platform rolled out? What does that generate in terms -- in your model in terms of revenue and operating cash flow in 2013?

Frank Elsenbast

Well, the business, this is Frank. The business used to run at approximately $8 million per year in revenue and if you look at the investment -- investor slides that we put out with our last deck, you can see that the number of impressions that we have are going up by little more than four times.

But that doesn’t necessarily mean that’s going to immediately be 4X of the revenue, but there is a directional relationship there. We think the CPMs will be higher because now instead of one local feed we will be able to sell advertisers at a national level, at a top 25 DMA, at a specific a DMA and even down to the specific hotel. So we think the ability, the scale of the network has and the ability to target ad to a very attractive demographic, we think there is an opportunity to significantly increase the topline here.

And then, we -- at the same time we’re also taking out about $5 million of fixed operating expenses. So the cost of goods sold on the business will be very, very modest. And of course, then we do need to build the team, so there will be operating expenses that go with that but it will still clearly contribute material amount of AOCF.

Now, I’d love to answer a lot more detailed questions on it, but we haven’t really -- there’s a couple negotiations that are still in place, we need to finalize some details, but our plans are as we go through the rest of 2012, we will be keeping investors up-to-date on where we are in the progress of the installation of the equipment, the signing of the sales partners and the sales process, etcetera. And we will provide incremental guidance as we go through the year.

Operator

There you. As there are no further questions in queue, at this time I’d like to turn the call back over to Ann Parker for any closing remarks.

Ann Parker

All right, Operator. Thanks to you. Thanks everyone for joining us today. A reminder that replays of this call can be accessed over the next month via the Internet through our company website, www.lodgenet.com, and the slides used during this webcast will also be archived on our website for your reference under the Investor section. If you have any difficulties downloading those slides, we would be happy to send them on request. Thanks again everyone and have a good day.

Operator

And ladies and gentlemen, this does conclude your program. Thank you for your participation. And have a wonderful day. You may disconnect your lines at this time.

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