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Executives

Scott Petersen - Chairman and CEO

Frank Elsenbast – Senior Vice President & CFO

LodgeNet Interactive Corporation (OTC:LNET) Conference December 7, 2011 9:00 AM ET

Operator

Aright, I think we are ready to get started. Good morning everyone. This morning session is with LodgeNet Interactive Corporation. LodgeNet is the world leader in delivering entertaining content and interactive experiences to more than 1.9 million, interactive hotel rooms and serves 10,000 hotel properties, as well as many leading healthcare facilities.

With us today is Scott Petersen, Chairman and Chief Executive Officer of the company. Scott has been with the company since 1987, is that right? Joined as the 11th employee and has been President and CEO, since 1998, and the Chairman of the Board since October 2000. Also, with me up here is Frank Elsenbast, who is the Senior Vice President and Chief Financial Officer of the company, and joined us in April 2010. With that, I turn it over to Scott.

Scott Petersen

Thank you very much, before starting my presentation, I’d like to introduce Bob LodgeNet, please.

(Video)

Good morning. We launched this video this fall to our hotel customers of course, as this is from the hotel’s point of view. It embodies our new Four Screen strategy, I’d like to discuss with you today, before getting to that, couple of framing concepts.

First of all, from investment perspective, we believe we represent a highly attractive market position, and from a growth opportunity standpoint we have proven and impactful strategies that we have implemented and are gaining financial benefits from, tracked a position to 85% market share within the VOD market within the hotel space, we present our products and services are very attractive consumer demographic. We have the best screen, within the hotel space, with the best content. In fact our premium VOD (inaudible) represents one of the top 5 channels, that’s watched in hotels, I will show you the data here, in a second. And from a pure financial standpoint, strong cash flows that we have been using over the past several years to deal over the balance sheet.

From a growth standpoint, proven impactful, the Four Screen strategy gives us an expanded mission, transition of high def is well under way, but we have a long ways to go, only 20% penetrated. We are launching a Mobile App here, within a couple of weeks. Our advertising program, I’ll give you an insight there, we are launching and taking that to a new level in 2012 for launching 2013 and Healthcare continues to be a very interesting opportunity for us.

From a size perspective, we are the larger provider, we will call interactive media and connectivity services to the hospitality market place. We own and operate within the Unites States, Canada and Mexico. Have licensing arrangements throughout the globe. About 1.7 million hotel rooms, we provide our services to, and I said that does give us about 85% share of that market.

We reach over a half a billion consumers annually, flowing through our rooms. A highly interactive, you’ll see about little pie charts below 98% of the guests who turn on the television. With a new platform now, 60% of the guests are going interactive, that’s 3 times higher than the prior platform that we have installed, for even a high def platform.

And as we move to Mobile now, of course on the smart phone, travelers over about 3 quarters of all travelers carry smart phones, of course that will be going up. Gives us an interesting opportunity, we believe to interact more with the traveler, especially from an ad and promotional basis. And the consumer than the room, highly affluent, highly educated, two times more likely to have household income over $100,000, that’s the demographic profile of the consumer within our room. And the 57% are more likely to have a college degree, so it’s a very interesting demographic that consumer companies are looking to gain access to.

Our room base today, from a hotel perspective 1.7 million, about 40% are in the upper market place luxury upper, up scale. That’s really I would say the heart and soul of the business, about 40% are in the mid markets, which is a larger parker place, but less penetrated from our perspective and then around 15 or 16% in independent and a very small amount in the economy change, which were at instance at this point of time, exiting from an interactive perspective, due to economics.

If you take that 1.7 million rooms, break it up by flag, about 20% of our rooms fall under one of the Hildner, the highest family brands. Starwood, Hyatt and then intercontinental represent the balance the companies, but 55% of our overall room count. At the brand level, they generally don’t have the power of the pen. So we create our programming and marketing packages for them, create the offers that they want us to offer their franchise owners, price points put together, general business terms, and then we take that to the, this 1500 owners and managers of the properties themselves, that do have the power of the pen. So our sales force goes out, secures contracts with them, and then you’ll see at the bottom right hand corner, we sign contracts with the actual hotel property. Mostly, there is different legal entities for every location, from a real estate standpoint, so it’s a very diverse space, even though it appears to be somewhat concentrating at the brand level, it is nicely diversified across, well over 1500 management companies and then 9000 locations.

One of the others, distinctive advantages we have within hotel space, so we live within the first window after the theatrical window, so movies generally start at the theatre. About 60 days thereafter, it enters our window, we share that with the airline industry. Then it moves on to home VOD and DVD, and eventually video streaming. So but, for the 60-day period of time that have it exclusively within our window, we are generating over half of the revenue we generate from any given title, from the earliest titles. So clearly it is one of those, opportunities for consumers to buy the freshest titles, because they fail to see them at the theatre, and they don’t want to wait before it hits DVD at home. And sometimes of course, there are certain titles, which you prefer not to, for e.g. Bridesmaids was one of our key titles this year. Apparently, lot of people didn’t want to take their spouse to see that in the theater, so they found the hotel room, as a good alternative.

If you take, if you consider LogdeNet VOD, as the number of guests that have bought the tiles and the length of time that that guests have used the content. The orange bar, is where it ranks as the top, as the 5th highest viewed channel, so it’s peak in the hotel room. The four broadcast channels are networks, have more view team by more guests. HBO show time kind of split right around us, and thereafter trills off quite dramatically, because everybody likes to have choice of cable channels. When it comes down to it, we represent a very strong position within the space. And this data has been relatively stable over the last several years.

So a very trim position in the market place, very popular titles and content viewing from the consumer standpoint. And as we look to the future, going back to our video we talked about the Four Screen strategy. This fall, we announced for the hotel industry at our Annual Technologies Symposium taking LodgeNet beyond just the traditional view point, of the flat panel within the room. So we have been in the broadband space for many years, for over a decade but just have been kind of distinct screens in their own way. So if you think about LodgeNet today, we are talking about interactive television, we are talking about web presence. Now we are launching our Mobile App, of course that will also be with the I-pad and the tablets, as that continues to expand dramatically as far as travelers are carrying, so more screens that we’ll present to our technology of course, from a hotel industry standpoint, just publish once, create the content once and distribute whatever screen makes sense for the guest, for the consumer at the given time. So it’s more than just guest entertainment, its entertainment, plus hotel services, plus advertising is a major push force at this point.

And I think the other important factor that this now allows us, the Four Screen strategy, is to untether ourselves from the room, especially from just the television. So the television will always be a focal point within the room. But as the guest is, now has his mobile device, whether it is a smart phone, or the I-pad, that they are at poolside, they’d still access information about LodgeNet, the services we provide, actually our hotel partners. We have room service ordering from poolside and they also think beyond. So it’s on the way. So instead of getting off the plane, before you hit the hotel, the abilities to order room service to be ready for when you do arrive at the hotel, are even making planning, of events say if one comes to New York, buying tickets etc. So that’s part of our Mobile strategy.

We do believe this has some very significant revenue in cash well opportunities for us. On the far left hand side, the bars was the revenue we’re generating today from our analogue base, which is a little over $15 revenue, per room per month. That’s split between the blue area is the entertaining guests, are purchasing from us on a pay per view basis. The burgundy space is, the revenues we’re generating from the hotel. They paid us a fix fee per room, per month for the basic cable services, ESPN, CNN, etc. As we’re moving to high def, that’s the center bar, we are experiencing a 64% lift in revenue we generate per room. That is our 12-month trailing to actual data, I’ll share little more breakup from there.

And now as we move into Apps and Ads, that’s the greens on the far right hand side, the revenues we see coming from these new services. We think that’s just adds another 25% n top of where we are today just from high def. So Envision Apps, generally those will generate revenues from hotels, subscribing for services, like in-room dining services, E companion services, making their properties more green, getting the rooms less cluttered, paper off the desks, every consistent revenue. It is a subscription based service.

The Mobile App, has a subscription based component from hotels, including Natpol’s also has guests trends out for tickets, for reservations. We believe there are also revenue opportunities there. And finally advertising services, that goes across all Four Screens, so from the television to the mobile to the web and (inaudible) very attractive demographic, we have within the space, but we are quite bullish what this can mean for us for the future. And the great thing is, you take that revenue, now convert it back to cash flow. All of these new services have high margins with minimal CapEx. So Envision Apps base gets the software as the service business model, so incremental and very low OPEX related to that, from that model.

Mobile is basically, a software implementation, enabling our platforms, to interact with the guest. Smart device is a software download upgrade, to the property of course, it’s the consumer just downloading the App to their device that enables all of the functionality. And advertising, also is a very low fixed cost operations, the way we will be moving forward with this in 2012, and 2013. I’ll spend a few minutes here in a second explaining that, the new thoughts on that. So we’re quite excited about what this all means, the Four Screen strategy, driving more revenue and even 30 to 35% if no cash flows on a proven basis.

So a couple of seconds on focusing on the ITV the interactive TV growth strategy, so high definition rollout is one of the key principles. We are generating more revenue there, we are only 20% penetrated, we’re very focused on enhancing our marketing to our consumers in the rooms. But we’ve implemented some interesting refresh and cheered pricing, which is driving browsing today, more people in the store, and driving higher revenues. This year from the Hollywood entertainment that we have seen, anytime since the start of the great recession and Envision which is our new interactive television, connected platform, we are seeing more guests engaging, going interactive and hotels are subscribing to our new services.

We publish this chart on a quarterly basis, just comparing our analogue revenues versus our high definition revenues. I have already gone through the data points. From the prior slide, with revenues up 64%, the revenue we generate here, on a proven basis, just to say cash flow on a proven basis, is running right now about $10.5 per room per month. We have done a fantastic job over the past several years decreased our capital investment levels to deliver this new connected television, it is not 50% over the past 3 years. Our current investment levels this year is running about $144 per room as you can see we are getting our money back and with a 5-year contract from the hotel in 12 to 18 months on a 5-year contract. So, very solid foundation for the company to grow only 20% penetrated this time and we can take the Envision platform certainly as going forward opportunity for us. We could also upgrade the software in all 300,000 rooms we already have installed with our prior high def platform so it enables sets us up very well for the future as we move forward.

Our marketing campaign we dubbed it VOD 2.0 cheered pricing have a $15 price point for the content that is exclusively in hotel window afore goes to DVD, once it goes to the DVD window we generally take that down to the $10 price point and as ages we have titles as low as $4.99. We’re finding this marketing campaign has increased our browsing activity which means people coming into our store by 20 to 25% we’re selling 10 to 15% more tickets though the average ticket price is somewhat lower, but we’re seeing positive increases in our actual revenue per room of about 5% for that and the interesting data point is even though we’re getting people in the store with a $4.99 price point 65% of the guests are buying at the premium price levels in mid teens so I think that shows the value of the premium content within our space.

And then in briefly and Envision, it is an internet connected system I think we’ve gone from high def we’ve made high def interactive now. We’re connecting a internet broadband pipe to our system so we can pull in data information content into the room that is internet sourced not just resident on our file server technologies that we have edge servers at all of our properties. The standard system delivers the basic apps, so the entertainment apps that features the premium VOD. We have TV on demand contents so things you just missed as you travel you can watch in your hotel room tonight. A variety of multiple purchase options car-to-car capabilities, of course check out through the interactive system.

Hotels are subscribing now the opportunity to take advantage of our interactive platform with such apps as like E companion so getting rid of all the writ materials that typically sit on the desk, big binder, very costly from hotel standpoint, hard to update, you put that all interactive on the system to can provide video, you can make it visual effects, you can make it more engaging from a guest perspective, same thing in Concierge apps, so room service ordering rather than calling down and order it, it is just simple engagement with the interactive menu place your order. We found our focus group say 91% of guests would rather interact with the television, place their order than use the telephone and call down to the kitchen and I think that all makes sense to us as we engage more and more with texting and other interactive communications that way than personal.

The financial background then for LodgeNet is we’re seeing with the Envision is going very well from a roll up perspective. Our consumers are going interactive so they are coming into our store 60% of the time. So 60% of the guests are that compares about 20 to 25% on our prior high def platform so greater guests engagement. Hotels are subscribing to our apps. We are significantly heading where we thought we would be. We are getting over 33% adoption rate by hotels who are saying I am willing to pay you a fixed fee per room per month so I can provide or get access to the power of your Concierge app, the power of your E companion app and right now that is also running over $3 per room per month which by itself is about 25% lift in cash flows per room. So, we are very pleased with where our Envisions are today.

The next step now is mobile, so as we’re travelling more and more of us are carrying multiple devices and mobile we think is a very critical aspect to the consumer. We’re launching in January, we’ve just been cleared with the iTunes store. We will be live and up in the iTunes store on December 19. The Lodge at Apple will be available for the android the iPhone and the iPad so on a very simplistic basis it turns into remote control for your television, so TV on/off, channels up/down all the basics that also has ties into the hotel services so you can do room service ordering and the hotel subscribes for that. They can also find up more basic information about the hotel and then local information about what is happening in the area. And for the iPad with a bigger expensive screen you can also for about a $1 a subscriber or consumer a year download an IPG (interactive program guides) you can actually see what is on every channel. So, as you hit CBS the TV automatically turns to CBS etc,. So we are very excited about that, we believe it does increase guest engagement with the television. The more of the guests are enamored with our systems. We believe that will enhance our revenues.

It will be available in about 500,000 rooms by the end of the first quarter of 2012. We also see this as a revenue opportunity to sell customization services to our hotel customers putting their apps on our mobile platform and then probably even more importantly this gives us the opportunity to create for the first time a one-to-one marketing relationship with the consumer. It is an over-the-top relationship so to speak we’ve never known who the consumer was in the room say 502 is just the person that bought something from us.

Now, on a permission based relationship of course again can then leads to greater opportunities for promotion converting your credit card points in to free content using your credit cards for purchases of content etc,. It really just opens up a brand new area for us and then lastly our advertizing growth strategy. Historically, we have been operating in about 320,000 rooms. We have our inserting adds on 10 cable channels and that is in standard desk. As we are looking to next year and launch for early 2013, we’re looking to expand this opportunity. We are finding the ad community is very intrigued by the opportunity to get in front of the consumers that we have in our rooms so we’re looking at expanding the room counts from 3000,000 to 500,000 plus. We’re looking from 10 channels today over 20 channels with our new ad network going from standard definition to high definition and going from just local national ad insertion of one ad running nationwide to putting local ad insertion technology at each hotel which then ties into new ad buckets for digital, lot of home should also drive CPMs and revenues for us within that space and we’re going from a situation where we’re leasing a transponder to pump to 10 channels to inserting our signals into our DBS provider one of the national DBS providers. So, we will be looking for their triggers, their tones for the ads and then putting our ads inserting those locally at the hotels. So, our impressions go for about 1.2 billion today to well over 5 billion going forward once this network launches, so we believe this represents a very interesting opportunity for us at the same time we’re continuing our expanded focus on driving advertizing revenues in our interactive television platform on our new mobile platform and also the web based advertising and lastly healthcare scenario where it is a very interesting and extension of our technology from the hospitality hotel industry into healthcare. The technology is very similar as far as the core aspects. The US hospital market is about 1 million beds. We think the target market is around 40% of that. The value prop here is not patient entertainment, but more patient education and patient’s safety. Interesting also from a standpoint we sell this technology at the hospitals for about a $1000 a bed to about 40% margin so it is a very interesting area for us.

Today, we’re in about 63 hospitals, we have about 10 hospitals in backlog. MD Anderson Cancer Center, Cedars-Sinai in LA, Brigham And Women's in Boston are some of the leading hospital institutions in United States are moving in our direction.

Every quarter we do publish our cash flow statement very strong cash flows. We try to provide the transparency, this last quarter if you took out some seasonal working capital issues $0.36 pre-cash flow per share so it is a $1.40 on annual basis today. We’re trading in the $2 to $0.40 range so from a cash flow to price perspective we probably can’t find a better higher better relationship of many stocks in the market than LodgeNet today and we have proven over the years with this very significant amount of cash flows that our business does generate that we pay down debt can pay down and deal over the balance sheet which I think we’ve done a very good job over the past 3 years we have paid down over $250 million of debt and we have taken our leverage ratio from about 4.3 times down to about 3.3 times and of course now with this lower debt allows us to get even more aggressive into our investments and to strategic growth areas by going forward. So, with that that is the LodgeNet story. I appreciate would take any questions you might have and we have a microphone here if you have a question.

Question and Answer session.

Unidentified Analyst

Who is your competition and how do you differentiate yourself?

Scott Petersen

Who is our competition and how do we differentiate ourselves. I can beat you to the punch. Basically, from the interactive television perspective there is no other national company in this space in the United States. There are few small companies that have IPTV technologies that have been created an IPTV system that they have taken to the hospitality industry. Total success rates, as far as total hotels served, kind of mind in the couple hands. So it’s a very pricy technology, and is still, is somewhat believing edge, so that hotel industry is interested in the technology, but not necessarily embracing it from a business perspective. The kind of perennial, that there is also one other interactive company, but it is focused on the gaming market, so the Las Vegas market.

That’s a subsidiary of COX hospital and COX business services. About a110,000 rooms versus our 1.7 million, they have not ventured outside of Vegas and Reno and Tahoe, they’ve become the major gaming organizations. We do have our presence there. We serve The Venetian, so that’s our biggest installation. Actually with 7,500 rooms, 2 panels, flat panels per property, 15,000. It’s a heck of a system. Local cable, of course would be the other aspect, but they really don’t have the interactive piece. They have lots of free channels, but that’s the extent. The lower that the market tends to go, with just basic cable, we are also fine, that we cannot make the economic numbers work on the interactive side, unless the hotel wants to participate in capital, for some kind of a subscription or guarantees to us. Okay.

Any other questions?

Unidentified Analyst

I arrived late, so I apologize if you covered this earlier in the presentation. Can you talk about the amount of relative, to your total revenue that advertising represents? And then can you talk a little bit about how, your right sales team positions to product in the advertising market, is it regarded to TV advertising, alternative or is it, it’s just allowed to pour more or what?

Frank Elsenbast

So, our advertised revenues over the past several years have been in the 7 to $9 million range total. And about, we have about 450, $416 million dollars on revenue. So it’s been a very small part of add up to this point. So we are looking to expand that quite dramatically. We think that there is an easy double, probably a triple involved in where the revenues can be. And of course, on the media bases, if fix costs gets covered, then it’s a high margin on the upside from there.

The positioning is the specific demographic that flows through the room. So it is, we have MRI data on household income, and it indeed was as twice as likely have household income over a 100,000 per year, as far as the consumer in the room more educated 50%, 7% more likely to have a college education and above. So it is presenting that demographic. So in the past we have had very good success for financial services, companies, the higher end of the automobile industry, the travel industry, those types of things. And that would be how one would position, the opportunity going forward.

Unidentified Analyst

Am sorry, I probably didn’t express my question well enough. Whose budgets do your sales teams go for, people in the advertising industry with the TV budgets or people with the advertising industry with the out of home budgets?

Frank Elsenbast

Historically, was TV budgets, but the opportunities was somewhat too small to really be effective in the TV budget space. Sometimes you got some remnants right, kind of a scatter. This now allows us because we can more localization, we already starting to have success in getting the out of home budgets. There is a lot of home market, but by having more localization opportunities. So good all the way down, to the zip code, the DMA, you know parts of the country etc, we think that will provide much more opportunity in that out of home market, advertising budgets. Thanks.

Frank Elsenbast

And I think that we are out of time. Thank you very much. Appreciate your time.

Scott Petersen

Thank you very much. Appreciate it.

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