Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Amy Kahlow - Director of Communications

John Buck - Interim CEO

Frank Elsenbast - SVP and Chief Financial Officer

Analysts

Barton Crockett - JPMorgan

Bob Evans - Craig-Hallum Capital

Jamie Zimmerman - Litespeed Partners

Randy Heck - Goodnow Investment Group

ValueVision Media Inc. (VVTV) Q3 2007 Earnings Call November 20, 2007 11:00 AM ET

Operator

Good morning, and welcome to the ValueVision Media's Third Quarter Earnings Release Teleconference. Following today's presentation, there will be a formal question-and-answer session. At that time, instructions will be given. Until that time all lines will remain in a listen-only mode. At the request of ValueVision Media, today's call will be recorded for instant replay. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Amy Kahlow, Director of Communications. You may begin.

Amy Kahlow

Good morning. Today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements may involve risks and uncertainties that could significantly affect actual results from those expressed in any such forward-looking statements. More detailed information about these risks and uncertainties is contained in ValueVision Media's filings with the SEC.

I would now like to turn the call over to Mr. John Buck, Interim CEO.

John Buck

Thank you, Amy. Good morning, and thank you for joining me on this call. A lot has happened since our last call, and I apologize for not being able to talk with you before today. I assumed the role of Interim CEO on October 25, and I felt that I needed to spend time getting to know our employees, vendors and our operations.

I also felt that it was important to have our third quarter numbers to share with you. My prepared remarks are focused in the following areas: I will talk about third quarter results, our guidance for the year, priorities for the fourth quarter, a little background on myself, my promise to you as the Interim CEO, and finally some thoughts about ShopNBC and its future.

And I [am giving you] heads up that my comments are probably going to run 15 to 20 minutes, so please bear with us. My goal here is to hopefully address your concerns and to give you reason for optimism going forward.

Joining me on call is Frank Elsenbast, our CFO.

Let me now briefly comment on third quarter, and then I will turn it over to Frank. You saw in our press release that our sales for the quarter matched last year's sales, and our adjusted EBITDA was $800,000 versus $1.4 million last year. We are not pleased with these results. We certainly felt the same impact that many retailers felt from a softer retail environment. But we feel our business can perform better. We continue to be very excited about our fast-growing internet business and the growing strength of our watch and gems businesses.

We'll talk about these opportunities later in the call. With that I am going to turn it over to Frank, and he will give you more details on the quarter. Frank?

Frank Elsenbast

Thanks, John. For the third quarter, sales were $185 million, which is even with the third quarter last year. Sales in several categories showed considerable growth versus the last year. These categories include gemstones, watches, apparel, and notebook computers.

These gains were offset by a reduction in our LCD TV business, which peaked in the third quarter of last year and has seen considerable margin erosion this year. In response, we have shifted hours to other categories that maximize our margin dollars per hour. Our internet business grew 18% over prior year and is now 28% of our merchandise sales.

Our gross margin for the third quarter was 35.2%, an increase of 80 basis points versus last year. The increase was driven primarily by the shift in our merchandise mix, away from lower margin electronics.

Operating expenses for the third quarter grew 1% versus prior year. This modest increase reflects the impact of our cost reduction plan, implemented in May, and that continues to be rolled out. This increase does not include the one-time CEO separation costs and certain severance and restructuring costs. These costs amounted to $3.2 million in the quarter.

Selling and distribution expenses were up 7% versus prior year, driven by a 5% increase in our (inaudible) and continued growth in our internet marketing programs. G&A expenses were down $2 million versus prior year due to lower salaries and related costs. It is important to note that both of these are down sequentially versus our second quarter of this year.

EBITDA for the quarter was 800,000 down 600,000 versus last year. While these results are below our expectations, we’re pleased that we can report positive EBITDA even when our sales growth is below expectations.

Let me handle the quick update on our balance sheet. We ended the quarter with a cash balance of $103 million, an increase of $1 million versus the prior quarter. The primary drivers include a change in working capital that generated $12 million. Our stock buyback program used $9 million during the quarter. Capital spending was $4 million, driven primarily by spending in non-IT projects and our warehouse consolidation project.

EBITDA and the interest income contributed $2.5 million. John will now give you an update on the outlook for the remainder of 2007.

John Buck

Thanks, Frank, and as he said I want to discuss plans for the fourth quarter, and I will also comment on our annual financial guidance. For the fourth quarter, we’ve five key events: Thanksgiving, Must Watch, Holiday Gala and the Best of 2007, plus our big Clearance Event in January. We have very-very detailed plans in place, and it is now dependent on our own execution. Quite frankly, that is the thing, and it's the challenge I have given to everyone including our vendor partner's execution.

We are off to a very strong start in the fourth quarter with an outstanding All Star event last week that resulted in an 8% increase over the last year. As many of you know, this is our biggest event of the year, bringing our top vendors together with our best products, best prices, best values, and we are very-very pleased with the results. It also gives me a chance to speak to our 60 top vendors and to talk to them about our business and our future.

I received a very warm reception and a strong desire to work with us and find ways to improve our performance and profitability. I am also excited to tell you that month-to-date, we were up double digits over last year in sales. We are coming off a wonderful weekend, where in all categories we had just great sales increase over the last year.

We will continue to drive our business to focus on key categories, gemstone jewelry, and watches, which are up 9% and 13% respectively on a year-to-date basis. Our ready-to-wear and laptop computer businesses are also up nicely for the quarter as well as year-to-date.

The momentum of our Internet business continues as we have recently rolled out our PayPal as a new payment option on our website. This is quickly contributing incremental sales and attracting new customers.

In addition, ShopNBC.com was just named through Internet retailers, Hot 100 for 2008. This was an honor for [stored upon] retail website that constantly innovates and sets a standard for online retailing.

With regard to our guidance, it remains unchanged, and we are reaffirming low single-digit sales growth and adjusted EBITDA of $5 million to $10 million.

Now, I want to talk about being Interim CEO. During this transition period, while we are searching for a permanent CEO. First, as I don't know most of you, I thought maybe just a quick background of myself might be helpful. I have an [undergraduate] degree from MinnesotaState University and an MBA from Purdue's Krannert School, and I have been over 30 years in business, primarily with Honeywell, that included living in Brussels, Belgium, for four years. I was a member of the senior management team that ran a $1.5 billion business, operating in over 12 countries and employing over 12,000 employees. My last corporate assignment was a five-year stint with Fingerhut, where I was President, and I led their direct-to-consumer retail business. I also helped launch Fingerhut's business services, which provided infrastructure to companies who were interested in developing a direct-to-consumer business.

As many of you know, we sold Fingerhut and made our shareholders very-very happy. I joined the ValueVision Board three years ago and along with my fellow Board members, have great enthusiasm for this company, it's employees and customers. As an Interim CEO, my promise to you is to protect the assets of this company, our great employees, our on-air hosts, our vendors, our carriage and our customers. At the same time, I want to reassure you that we will not sit still during this period. I think that it can best be summarized that we will be aggressive on a tactical level, but there will not be strategic changes until a permanent CEO is named. We will position this company for improved performance and profitability and give to our new CEO a company prepared to deliver consistent earnings.

Let me explain it a little bit further. We'll continue to manage this business aggressively on the top line, with an increasing focus on the bottom line. For our consumers, there will not be a significant change in appearance of our network or Internet sites; we will continue to bring our customers' unique products at great values. We will continue to work with our vendors to provide the most compelling products that maximize gross margin dollars, and our hosts will continue to build trusty relationships with our customers. In short, the customer-facing portion of our business will continue to look largely the same.

Our focus for '08 is improving the earning power of our company and the identification of profitable revenue growth opportunities. We are in the middle of developing operating budgets for '08. All of our business leaders have been asked to come forward with ideas, action plans to grow profitable revenue, reduce costs and improve our efficiency. Assisting me and our management team in this process is Alvarez and Marsal. Their specific task is to do a complete business assessment and provide a recommendation that results in improved performance and profitability. They are scheduled to report to the Board in mid December. I must say I am very encouraged by my weekly meetings with them. Parting with management, they have developed some big ideas that we will validate and test. I believe the net improvement to our financial results will be significant.

We will also be focusing on improving our gross margins. As many of you know, currently, we trail the industry, and this is unacceptable. Part of this difference is the scale, but there are other differences that we are very (inaudible) after. The biggest opportunity is our merchandise margin. As our business has grown, we've expanded the amount of direct sourcing that we do from Asia; this trend will continue. We are also working with our vendors to identify opportunity to differentiate product, increased value and reduce cost, all across our merchandise categories.

Another area we feel good about is improving economics of our shipping and handling operation. We took the first step of this process by consolidating our distribution center into our state-of-the-art facility in Bowling Green, Kentucky. This facility is ideally located along major transit lines, and it allows us to reduce our delivery times to our major east coast customer base. We are beginning to realize the labor savings from this efficient operation. We look forward to additional freight and transportation savings, as we optimize our carrier network.

How much do these opportunities add up to? We are currently working through that process. Some of the cost saving measures we are taking this May, others will be implemented over the next three to six months. When we are done, we expect to have a cost basis that is significantly lower than it is today.

In the longer run, another significant cost savings opportunity is to reduce our program distribution costs. Many of these transacts expire at the end of '08. There are many opportunities for us as we work with our partners on our new carriage deals, digital cable, video on-demands, interactive TV and reduced leased access rates. All of these represent opportunities for ValueVision to provide additional services to their customers and potentially reduce our significant carriage cost.

Now, let me give you a quick update on the CEO search process. We have retained Spencer Stuart. Spencer Stuart has worked very closely with our board over the past year; they know us well. And they know the type of CEO we are looking for. And we are very excited to be working with them on this process. That being said, the search will not be a four week process. We expect the process will most likely take four months to six months.

Now, I want to turn to the future of ShopNBC. The Board of Directors is very bullish about this company. We feel ValueVision has a unique combination of wonderful assets. We have a network that reaches nearly 70 million households and an internet business of over $200 million in revenue, which continues its rapid growth. We have over 300 vendors, who are experts in product development and are essential partners in this business. Our hosts are some of the best sales people in the business, who build strong and trusting relationships with their loyal customers.

It's really this unique set of assets that gives ValueVision such a strong platform for growth in to the future. I hope my enthusiasm is coming across in this call for our unique assets and growth opportunities for this company. But I also realize this company has its challenge at this. We are approaching $800 million in annual sales, and we do not deliver any net income to our shareholders; this has got to change. Our shareholders demand this; our employees and vendors demand this. All of our stakeholders understand that the long term health and viability of our business is dependent upon growing this business into a dynamic and profitable enterprise.

Earlier, I discussed in detail our focus on costs, but this is not the long term solution for adding shareholders; we need to grow this business. How will we do this?

There are several opportunities that we are well positioned to [look after]. First, our Internet business will continue to be the engine of our sales growth. Our online business has been very successful on both supporting our TV business, while also extending our retail reach to aggressively market into e-commerce buyers, and expand in to certain products, and in engaging site feature.

More and more of our TV customers are opting to order online. This conversion has several benefits to our company and most of you are aware of them, but again, its cost to order capture is very low when compared to phone [co-process]. Our customers are able to browse our entire selection and frequently buy incremental items to purchase from their favorite designer, etc. And third, the Internet allows them to shop when it's convenient to them.

We also expect our core TV business to continue to grow and be a source for new customers. Our distribution footprint continues it’s 5% gross rate. These are new in homes representing new customers for us. These customers are increasingly interacting with us through the Internet channel as well as ordering on the phone.

We'll expand our online business beyond ShopNBC.com, but first our ShopNBC.TV video commerce site that was launched in the first quarter of this year rolled out the next generation of Internet video functionality last week. If you haven't checked this site out please, please do. It's a wonderful site; it's easy to maneuver through. The clarity is incredible. And I think if you haven’t again, I think you will see why I am so enthused about this opportunity for us. In it, you will find that we lead the industry and the quality and search functionality of internet video.

In addition to video cameras initiative, we will be launching our first category specific site in the fourth quarter, watchorbit.com, it will leverage our deep watch assortment along with a focused website to deliver an exclusive e-commerce experience for serious watch buyers.

So, now let me summarize. Again I apologize for my lengthy comments. But, I felt that it was important to give you a full story of the opportunities that the board and management continue to see. [To recap the] key priorities for ValueVision going forward, is one, deliver great execution in the fourth quarter.

Two, continue to grow Internet business. Three, strengthen the core of our TV home shopping business. Four, partner with Alvarez and Marsal to develop a great operating plan for '08. Five, work with our distribution partners to extend our carriage agreements on a mutually beneficial terms. And finally, find a world class CEO for ValueVision.

My promise to you is, I will do my best for our owners. And will focus on improving the experience for our customers and helping our employees to be successful. I am going to open it up for questions in just a moment but (inaudible), number one, one is the status of our stock buyback program. The facts in the third quarter were we [repurchased] 1.1 million shares, at an average cost of [$8.08] for a total expenditure of $9.2 million. We currently have 14.3 million remaining on our buyback authorization. The company feels the stock is trading at a significant discount. We will reenter the market when our blackout period this Thursday the 22nd of November.

I am sure the second question is will you expand the authorization. And the answer there is the board will reevaluate further future authorizations when needed. I will also say the board also feels it's very important to maintain a strong balance sheet for our future CEO. Is the board seeking to sell the company at this time? The answer is no. We are focused on improving the profitability of ValueVision and finding the best possible CEO to increase shareholder value.

The next question I hear a lot is do you believe ValueVision can be a standalone business, or must it be merged? ValueVision can absolutely remain a standalone company, with our scale approaching $1 billion a year in sales, and with our strong balance sheet and all the opportunities I discussed earlier, we have the resources we need to be successful.

Another question I hear a lot is, do you have any plans to monetize any of the assets currently on your books including the Boston TV station, value pay receivable the commercial real estate owned by the company. While we currently do not have any plans to monetize these assets, we will explore all ideas with our board that will contribute to growing shareholder value.

With that, I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Barton Crockett, you may ask your question, and please state your company name.

Barton Crockett - JP Morgan

Okay. Great. Barton Crockett from JP Morgan, and thank you for taking the question. First, I think the question that's really foremost in everyone's minds, that I didn't see your answer in the script, and that is if you can talk about why basically the board asked Will Lansing to leave, and what do you believe was the reason for that? And what do you believe his successor could do better than Will was doing in that position?

John Buck

Barton, thank you for the question. I think some of you know that I have talked to -- Will is a very close personal friend. A business colleague for many years, and so I am sure you can appreciate just how difficult this was for everyone involved. This was a decision that was done in a very careful, thoughtful way. And I think rather than getting into board discussion and discussion with Will, I think it's just suffice to say that we were not pleased with the overall performance of the Company, and we just felt now was the best time to make a change. And again, Barton, I can appreciate the interest, but I just don't think it really helps to go back in time. I am really focused on today and going forward.

In terms of the new CEO, we are obviously looking for somebody that's got a proven track record, somebody that has that experience in the retail business direct-to-consumer, someone that's got Internet retailing, home shopping, and I have to tell you based on my conversations with Spencer Stuart on a weekly basis, I am pretty excited about at least initial work that they have done, and I am excited about our future prospects.

Barton Crockett - JP Morgan

Okay, great. If I can follow-up, the second part of my question was really what could someone else do better in terms of improvements, and can you elaborate a bit, I mean, where is ValueVision executing at a sub-par level, and what could someone else do? What are the opportunities for improvement?

John Buck

Yeah, thank you again. Well our mind is, we have got an $800 million business here that's not delivered $1 of net income. We have had some fairly nice growth, maybe even significant growth over the last three, four years. But there has to be a balance between that growth and also being profitable. I think what we are looking for going forward is a CEO that has that balanced view, if you will, continuing the growth path that we have been on, and I think we've got such wonderful platforms that I referenced earlier. But at the same time, being sensitive to the cost structure of the business. And so I think finding more of that balance, if you will.

Barton Crockett - JP Morgan

Okay. Alright. And then if I could switch gears here a little bit, your commentary that the fourth quarter has started off so strong, obviously very interesting. And I was wondering if you could elaborate a little bit more on what's changed, because the third quarter churn was flat year-to-year, in the fourth quarter you say you are starting off, I think the number was 8% up on [ouster] of that. Was it mainly an issue of comps, in other words, LCD maybe, that comp has eased as you kind of enter the fourth quarter, or was it just momentum on some of the new initiatives, or was it just despite of that retail environment for some reason you guys just had to (inaudible) there?

John Buck

Well I think, I wish I knew that question and knew the answer to that. I'll give you a few thoughts, and then I'll let Frank chime in.

We did have just an outstanding All Star Event, and a lot of it has to go to the credit of the organization, it's planning, it's preparation. I mean, we had this thing really down pat. I will also tell you we had a very-very enthused energetic evening with our top vendors, where we really laid up a challenge to them. There was a lot of energy and people left excited, and we really talked about the All Star event not only being a five day event, but really that's what we need to do in the fourth quarter. So I think it's just maybe a combination of a whole bunch of things, certainly the planning, preparation from everybody in the organization, all of our employees. I think our vendors and our guest vendors were really-really excited. They want to make sure we are successful. We obviously have the right products and the value that customers were looking for. So we just hit it on all cylinders. I would also tell you that that has continued. As I mentioned, we are at double digit growth.

It is what it is today, and I am excited to share that with you, and we'll just see if we can keep that going through the fourth quarter. We've got some very exciting events coming up, five more events. We've got that big clearance sale in January, but I would also tell you, the organization has really got, the plans are very detailed, and it's a matter of us executing and hoping that customer continues to buy.

Barton Crockett - JP Morgan

Okay. And then one final question, and then I would like to get out of the line, let others ask questions. There has been a few analyses that I've looked at. What would ValueVision be worth if the company were in a liquidation scenario, which I know is not what you put on the table out here, but I wanted to ask the question. Given that arguably and some type of wind down of liquidation scenario, you could extract value that is near or above where the stock is currently trading. Why not look at that right now and what would have to happen to get you to consider that type of scenario?

John Buck

Barton, again thank you, and first off, I want to give credit to [Sound Port], I am sure that's who you are referencing, Sound Port Partners.

Barton Crockett - JP Morgan

Right.

John Buck

We credit them for their homework and putting together a very detailed letter. I would say their position is very, very clear. I do, and the board and I, everybody agrees that this company has some wonderful and valuable assets. But I would just say at this time, we don't agree that that's the way to realize shareholder value. We think there is more value here through unlocking the profitability to this company, and quite frankly my focus right now is, as interim here, is I am working with this officer team, working with Alvarez. As I mentioned, I am pretty excited about having Alvarez and Marsal in here. They have come in with a fresh pair of eyes. They are looking at it and the officer team, probably equally important, may be more importantly has really embraced this. And we are really thinking outside of the box, and I really, I think the focus on that, the focus on executing the fourth quarter, putting the plan together for '08 and recruiting the CEO is really the direction that board that we've all agreed to. That's the best path for increasing shareholder value.

Barton Crockett - JP Morgan

Okay, great. Thanks a lot.

John Buck

You are welcome.

Operator

Bob Evans. You may ask your question and please state your company name.

Bob Evans - Craig-Hallum Capital

Craig-Hallum Capital. Good morning, everyone.

John Buck

Good morning, Bob.

Bob Evans - Craig-Hallum Capital

Can you comment a little bit more on the Alvarez-Marsal process in terms of the -- maybe prioritize the potential biggest areas of savings or efficiencies. And then maybe elaborate, I mean, I know you can't give a number necessarily at this point. But are we talking about meaning -- from what you are seeing thus far, are we talking meaningful dollars, not a couple of million, but are we talking double digit type of million opportunities over aggregate opportunities?

John Buck

Yeah, thank you, Bob. We are not going through all this work for a single digit improvement. And based on what I am seeing and by the way I am participating in a lot of these reviews, I just spent yesterday all day going through our whole merchandising organization and our planning and programming, promotional organization. I just think there is a lot of opportunity. So there is a lot of hard work being done by the organization at large, and again we are not going to put this kind of effort into this for a single digit improvement.

The process, it's really a nice process in that this is the time of the year we normally go through our budgeting process for '08, and so we've integrated Alvarez and Marsal into that process working with all of our budget owners, looking at their specific budgets. Questioning, why did we do it this way; why did we do it that way?

And at the same time we are also looking at some of these big ideas I referenced, and I just assume not going to that at this quarter. I think it's just too early, and quite frankly all of us need more time, more work. But we are on a fast track. Alvarez, this is a 60 day assignment in and out. And that we are going to reporting to the board in the December timeframe, the buckets we are really looking at are growing our revenue, and there is top line opportunity for us here.

Obviously, a 35% gross margin is unacceptable. And we think there is some real opportunity in that area, and certainly in the merchandise area, working with our vendors, we think we have got some real opportunity there. We just can't be sitting at, and you guys know this as well, where our competition is, where our competitors are, and we are sitting at the 35% gross margin.

And then, we are continuing to really look at our operating expenses, and I think there is again some more room in that area. So, to sum it all up, we are in the middle of this, it's very detailed. These are long-long days. But I got to tell you; I leave like yesterday. I got out here last night, and I was full of enthusiasm because of the opportunity we see. And we are not doing it for single digit improvement.

Bob Evans - Craig Hallum

Do you believe you can do some other things you want to do that are meaningful but not towards the top line, and I think that’s some of the fear that was maybe first recognized when they saw that Alvarez is going through a cost cutting initiative.

John Buck

Absolutely, and if I didn’t, that was one of the themes I wanted to convey in my opening remarks, is that with our assets, we think we have got some incredibly valuable growth opportunity. So, that’s a rule that we have amongst ourselves and with Alvarez and Marsal is we don’t want to do anything that impacts the revenue side of this business, impacts our customers, impacts our ability to continue to grow the business.

Bob Evans - Craig Hallum

Okay. Thank you. And then a question for Frank on the G&A and D&A that were both down sequentially year-over-year; is this kind of the right baseline to think about I guess for both items going forward, or how should we think bout it?

Frank Elsenbast

Bob, I think on the G&A line, the third quarter may be a little bit of a low watermark, just because this is the quarter that we did reverse some of the bonus accruals that we had on a year-to-date basis, but it's not going to go up significantly. It should still be in the between 5.5 and 6 on a go forward basis.

Bob Evans - Craig Hallum

Okay. And how about depreciation; I know that that number has been coming down. Is there something that happened a while ago that’s ruling off?

Frank Elsenbast

Right, the decrease that you have seen in the D&A line is driven by some significant IT projects that were initiated 5 years ago, our Oracle launch. A lot of those investments are starting to be fully depreciated, and you’ll continue to see that line come down and probably be closer to $4 million as we go into ’08, $4 million per quarter, between $4 million and 4.5 million.

Bob Evans - Craig Hallum

Okay. Alright. Thank you.

Frank Elsenbast

Alright.

Operator

Jamie Zimmerman you may ask your question, and please state your company name.

Jamie Zimmerman - Litespeed Partners

Jamie Zimmerman, Litespeed Partners, how are you? With 70% of the carriage turning over in '08 and NBC controlling that process and NBC’s contract having to be renegotiated in 2011, are they helping you or hurting? And how do you work with that interaction?

John Buck

Thank you for that question. And as I noted in my comments, you are exactly right; our carriages are coming due in '08. We do look at that as an opportunity for us. In terms of the GE/NBC, I would say they have been really, really good partners in helping us plan a go-forward negotiating strategy. But remember, or keep in mind that we will be negotiating contracts that are in the best interest of ValueVision.

And to be honest, most of these contracts are due to end of '08 so we're really just now getting started. It's early in the process. And in fact, our priority right now is really developing a go-forward negotiating strategy. But we will be focused on doing what’s right for ValueVision.

And again, I think GE/NBC have been wonderful partners in these discussions currently, and in fact, there is a meeting scheduled next week in New York to further these discussions. So, I see it as a positive.

Jamie Zimmerman - Litespeed Partners

On what basis, I mean what have they been able to do that you couldn’t do otherwise, and what position does it put you in it that they have to get renegotiate in 2011?

John Buck

Well, they obviously have a lot of experience in this area. They are large shareholders of this company. We have our own internal resources, and this is something that we've also developed a set of skills and experiences. So, I am very confident in our management, in our partnering, that we'll able to negotiate these contracts that will be favorable for ValueVision.

Jamie Zimmerman - Litespeed Partners

Are there any contracts that are particularly unfavorable now?

John Buck

Yeah, I don’t know if I can name the contracts, but we do have some contracts that I would say too are unfavorable, that we're going to want to renegotiate the opportunities, some of these come up in '08. A lot of them come up in '08, but we have a feeling that they are up further, but I'd just assume not get into that level of detail, if you will, over the phone here.

Jamie Zimmerman - Litespeed Partners

Yeah, no problem. But you are talking about gross margin. When you look at your competitors QVC and HSN, they are paying for carriage about 5% to 8% of revenue, and you guys are paying around 18%? Obviously, you know that, because it's a set dollar amount versus a percentage. Is there any way on a smaller revenue base that you think that we will able to negotiate something that's more contingent?

John Buck

The answer is, everything is open for discussion, and we need to negotiate contracts that are favorable to ValueVision that meet our needs. And quite frankly I don't want to be going forward with that kind of anchor around me. I mean, we need to find win-win. And again I appreciate the question. You are right on the money. This is an area of opportunity. But I don't want to go further into negotiating or outlining our approach to this at this point.

Jamie Zimmerman - Litespeed Partners

Thank you.

Operator

Randy Heck, you may ask your question, and please state your company name.

Randy Heck - Goodnow Investment Group

It's Goodnow Investment Group. My questions are basically the same thing, and that is the opportunity in front of you with the distribution cost. I assume you are going to try to go and tie to a 100% revenue share rather than you pay $2 of sub today. So, for example, if you can cut it in half, obviously you are making more than a $1 a share after tax. With the development of the ShopNBC.TV website, could that come into play in negotiating with the MSO's, meaning you get distribution for free rather than paying $2 a sub?

John Buck

Very, very, very good. It's a very astute comment. The answer is, we have a lot to offer. To your question and the previous question, you've really focused on an area that we really believe we have some opportunity going forward, and we are going to do what's right for ValueVision, and position us for the future.

The good news is a lot of these contracts are up in the end of '08, I would also say to you I am very, very confident that we are going to be able to negotiate contracts that are win-win for both sides. And your particular comment around the .TV, there is an opportunity there. So, again I think the message here is we are all in agreement about the opportunity. It really now to gets back to our own ability to execute.

We are starting early and developing our own go forward negotiation strategies. We are pulling in the experts if you will. We are going to reach out to people that have expertise in this area, along with our own people. And I think we'll be at the end of the day pleased with the results. But I would also tell this is all of a bit, when I say they are up for renewal lot of must be end of '08. So, we'll be using '08 as the negotiating time period.

Randy Heck - Goodnow Investment Group

Right, just as a follow on, what is your estimation of what QVC and Home Shopping pay as a percentage of there sales per FTE, or yes as a percentage of their sales per FTE?

John Buck

I am going to actually pass on this one, and my only thought here is we've got to be very careful and for me in particular recognize, I became Interim CEO October 25, so I think this would be one I am going to just pass over to Frank.

Randy Heck - Goodnow Investment Group

Okay. Alright, thank you, good luck.

John Buck

Thanks.

Operator

(inaudible) you may ask your question and please state your company

Unidentified Analyst

Hi, guys (inaudible). Yeah, I hope I didn’t imply by the letter in the filing that's how you guys should be looking at the company. That’s certainly not what I think should be done to realize the value here. But I guess just one quick comment. I think you guys have been great. First of all the quarter was great, and second of all you guys have been very responsive and, I think, really taking your fiduciary responsibilities seriously.

And I guess the question along those lines would be, given where the stock is if you agree with the analysis that it's trading below its non core assets. And you agree that the stock is cheap, at what point does it become almost not in your fiduciary duty to do an aggressive stock buyback.

It's seem like the only thing, the only possible action that you could take would be an aggressive share buyback as long share stayed at this level, and the capital for that could come for any of the -- whether it is not suggested or another way, but I guess I can't conceive of a situation where that wouldn’t be the right thing to do to for shareholders?

John Buck

Jamie, thank you for the nice comments in your introduction there. Well, as I indicated, as soon as we get out of this blackout period, we will be back in the market. I also indicated that the stock is at a significant discount. We are going to be back in the market, we are going to be back in a very discipline manner.

I don’t want to really disclose the methodology, how we are going to be buying and when we will be buying, but we will be back. And as I said it is at the significant discount. Once we have gone through the authorization. Are nearing spending to the authorization, we will have our Board reconvened the bond, we will talk about our next step. The balancing act that we have here is clearly this significant discount of stock price and at the same time we have these wonderful assets, we have a nice balance sheet and we are focused on the fourth quarter executing this plan.

We're focused on getting in getting the input from A&M and we are focused on a new CEO. I think we have got just a lot of good stuff going on here and we would also like to be able to give our CEO a company that can achieve sustained earning power going forward and a nice balance sheet. So, that's kind of a balance that we're talking through currently.

Unidentified Analyst

I understand that, but I think given $103 million of cash and additional what I would estimate $100 million to $150 million of non-core assets. I guess I don't understand why those things can't be done in tandem? Why you are not going to look back at this point with the stock at 5.50 a share and say that was really dumb of us, we should have bought back a lot more of stock than we did, when we had the opportunity. So I guess what is actually so difficult about being the more aggressive [preferreds] of your stock. Given that even if you took the cash balance down to $10 million or $20 million, the new CEO could easily monetize any of those assets and bring it back up over 100, if your CEO saw that?

John Buck

Yeah, I don't know if we are necessarily in a disagreement or debate here. I am just simply saying our stock is at a significant discount, one. Two, we will be back in the market. We have 14 point some million remaining in that authorization, and we will then reconvene on our next steps. And I am going to --

Unidentified Analyst

Have you considered an accelerated stock repurchase program?

John Buck

Pardon?

Unidentified Analyst

Would you consider an accelerated share repurchase program?

John Buck

You know what I think; everything is on the table, Jamie. I mean, we are looking at as I said, we've got a lot of things right now with executing this fourth quarter, A&M and a CEO search and a wonderful set of assets in the balance sheet. And we will be looking at all of our options and what we think we'll deliver significant shareholder value

Unidentified Analyst

Okay. Great, and just to confirm, even though this isn't your focus, and certainly you did a lot on your play, if you were approached with an offer, you would consider that seriously, and is there any level at which an offer would have to be above in order to meet that threshold to be an interesting or legitimate offer in your opinion?

John Buck

Jamie, I think I can't go there with that question. But I'll just say to you, as I said in my comments, we're not interested in selling the company at this price. We've got a lot of actions in place which I've discussed with you and the others, and we'll just wait and see. I really can't comment further on that.

Unidentified Analyst

Okay. Alright. Well, great job guys, and thanks for the call.

John Buck

Thank you.

Unidentified Analyst

And good luck.

John Buck

Thanks.

Operator

Bob Evans you may ask your question. Please state your company name.

Bob Evans - Craig-Hallum Capital

Craig-Hallum Capital. Well, it's a tough one to follow-up, on the previous caller. But one clarification is on the -- just back to the distribution side of things. Can you elaborate a little as to why you think the different cable owners [size] and those that you are going to be renegotiating with? Why ShopNBC is something they want to have on because I think some may have fear, that this could create an issue for the company in terms of the distribution being renegotiated versus and opportunity.

John Buck

Okay, Bob. Thank you. In terms of risk to the carriage, I mean our priority is to successfully renegotiate with our distribution partners, first point. Second point, we are a different company today, and we negotiated those contracts several, several years ago. I mean today we have $800 million in revenue. We have got lot of wonderful assets with our .com and our .tv and you can imagine some of that cross-over there. We are a revenue base for these companies. I really am pretty optimistic that we can find that win-win formula that meets their needs and meets our needs and I am certainly not interested in losing the carriage, if you will, that's the risk I would like to somehow eliminate that as being the risk. That's not our go-forward strategy. Our go-forward strategy is to successfully negotiate. And I do think we have a lot of weapons. Again I don't want to get into that into our negotiating strategy in this phone call.

Bob Evans - Craig-Hallum Capital

That's fine. And my understanding is that the digital cable homes are significantly at a much different pricing, discounted pricing than say the analogue homes and that should have some benefits to you as it relates to decreased distribution costs going forward. Is that correct?

Frank Elsenbast

Bob this is Frank. And yes the digital cable rates tend to be at least 50% less than what we pay for analog and we don't see 50% reduction in the productivity. So, digital cable for us works very well and as it becomes more highly penetrated. That becomes a better and better option for us as we go into the renegotiation.

Bob Evans - Craig-Hallum Capital

Okay. Alright. Thank you.

Operator

Jamie Zimmerman you may ask your question and please state your company name.

Jamie Zimmerman - Litespeed Partners

Litespeed, and again it's a second question like Bob's. We have experienced NBC negotiating for non economic priorities, and I asked this question, but I would like to ask it one more time. What makes you sure that NBC is negotiating for the benefit of ValueVision and not for the benefit of themselves, for their other interest aside from their stock ownership in this company?

John Buck

I can only again thank you for the question. I can only tell you the people that I know, the people that I work with, Members of our Board our fiduciary responsibilities are to our shareholders, to the share holders of ValueVision, and that is the priority of our Board. And I am very, very confident that we are all in line with that objective.

So, quite frankly, I would say this to you, they've actually reached out as well to us in wanting to help us find ways to go forward in negotiating these contracts. So, again today is a different day compared to when these contracts were negotiated some several years ago. The company is different today. We are a significantly larger business today.

Back in the days when lots of those contracts were negotiated, as you know we were a much different looking company. So, in my being overly optimistic, I am trying to be just very objective, and say this is a bucket, an area of opportunity for us. It's got our focus. I can tell you that it's got our focus. It's on our radar. We've got people that are working on this.

We will be in New York again next week and these transacts don’t come up till the end of '08. That are not going to be easy by the way, these aren't going to be easy negotiations. But I think we have a lot to offer. We are not go into this being shy at all. We are not go into this not being proud of what we have. And I am confident we'll negotiate good contracts for both parties.

Jamie Zimmerman - Litespeed Partners

Thanks.

John Buck

I can't say anything more.

Operator

And at this time I show no further questions.

John Buck

Okay. Thank you everybody, and let me just take this opportunity to wish and your family the very, very happy Thanksgiving. I hope you get an opportunity to spend time with your love ones, and enjoy the holiday, and think about us, and think about us executing those big five events and the clearance in January. And we look forward to talking to you early part of the year.

Frank Elsenbast

Thanks.

Operator

Thank you. This does conclude today's conference. You may disconnect at this time. Thank you.

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

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

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

Source: ValueVision Media Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts