Martha Stewart Living Q4 2007 Earnings Call Transcript

Feb.20.08 | About: Martha Stewart (MSO)

Martha Stewart Living Omnimedia, Inc. (NYSE:MSO)

F4Q07 Earnings Call

February 19, 2008 10:00 am ET

Executives

Howard Hochhauser - Chief Financial Officer

Susan M. Lyne - President, Chief Executive Officer & Director

Robin Marino – President, Merchandising

Wenda H. Millard - President, Media

Analysts

David B. Kestenbaum – Morgan Joseph

Michael Meltz – Bear Stearns & Co.

Richard R. Tullo – Sidoti & Company, LLC

David Bank – RBC Capital Markets

Michael Kupinski – Noble Financial

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia fourth quarter 2007 earnings conference call and webcast. All participants will be in a listen-only mode until the question-and-answer session of the call. At the request of Martha Stewart Living Omnimedia this call is being recorded. Anyone with objections should disconnect at this time. At this time it is my pleasure to introduce Howard Hochhauser, Chief Financial Officer of Martha Stewart Living Omnimedia. Sir, you may begin when ready.

Howard Hochhauser

Good morning everyone. Welcome to our conference call to review fourth quarter 2007 results. Susan Lyne, our President and CEO will bring you up to speed on strategic developments including today’s announcements then I will talk about our recent performance and our outlook for the first quarter and the full year. Robin Marino, our President of Merchandising and Wenda Millard, our President of Media will join us for a Q&A session following our prepared remarks.

Before turning the call over to Susan let me remind you that our discussions will contain forward-looking statements which are made pursuant to the Private Securities Litigation Reform Act of 1995 as amended. These statements are not guarantees of future performance and involve risks and uncertainties which are difficult to predict. Actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors.

Now let me turn things over to Susan.

Susan M. Lyne

Thanks to all of you for joining us today. We’ve got a lot of ground to cover and all of it is great news for MSO. In addition to our strong fourth quarter results and our return to profitability in 2007 we announced this morning two acquisitions that should serve as a clear illustration of where this company is heading. Since 2002 when MSO was essentially a magazine, Martha Stewart Living, and a merchandising relationship with Kmart, the company has expanded and diversified to a business operating over 25 distinct brands across our publishing, merchandising, Internet and broadcast platforms and that is how we manage the business, as a portfolio of brands.

Today we announced the purchase of Emeril Lagasse’s media and licensing company and also the acquisition of a 40% stake in WeddingWire. Emeril is an outstanding complementary asset for us. He gives us one of the biggest brands in food related content reaching 85 million TV households in addition to selling over 4 million cookbooks and an array of products with companies such as All Clad and Sara Lee. Emeril’s business model is lean, is profitable and it will contribute significantly to our earnings in 2008. We’ll run this is a stand-alone brand within the MSO family creating top-line and ambience reach synergies with in-house brands like Everyday Food, our respective TV programs and our Internet platform. Emeril is a multi-platform lifestyle brand like Martha so this is a model we know well.

Our new partnership with WeddingWire also announced this morning is another variation on that brand theme. When we reported last quarter our closure of Blueprints we said we would redirect some of that investment into the expansion of our weddings franchise. Wedding-related advertising in the US is a $1.5 billion market and it’s fragmented particularly at the local level where engaged couples have to evaluate dozens of businesses in planning their big day. WeddingWire has a great technology platform designed just for this purpose and it’s very effective. We’re taking a 40% stake with an option to acquire the whole company down the road and we’ve put in place a commercial partnership to integrate their tools and services on www.MarthaStewart.com and also serve as a national ad sales force for WeddingWire.

These two deals support a strategic focus this year that is built around three core elements. Enhance and diversify our brands, grow our digital business and our cross-platform franchises and build sustainable profits and cash flow for the company. We’ll talk more about Emeril and WeddingWire as we move through the call this morning and as we talk with many of you in the coming days and weeks.

Let me turn now to the results for 2007 which was clearly a very important year for MSO. It’s a year in which we delivered on our promise to return to profitability and positive cash flow from operations. The fourth quarter marked a terrific conclusion to that year with 22% revenue growth and improvement in all key measures including operating income, adjusted EBITDA and of course net income. Our performance was led by the continued resurgence in publishing and our increasingly diverse merchandising business. We’ve also seen some very positive development in our Internet operations that I’ll talk about more in a moment. Our revenues were up 14% for the full year and the gross was broad-based encompassing existing brand franchises and newer initiatives. Flagship brands like Martha Stewart Living Magazine showed strong growth in ad pages and revenues both of which were near all time highs in November and December.

Our Internet platform is benefiting from sharpened management focus under Wenda Harris-Millard and is demonstrating accelerating growth in key metrics. In fact unique visits, page views and advertising revenue all showed increased sequentially in all three months of the fourth quarter. In broadcasting which plays a key role in extending the reach of our how-to content and ideas we’re seeing solid ratings, stronger demos and better revenue from product integration as we execute on our improved formats. And in merchandising we are off to a very strong start with our Macys line and we are beginning to see additional returns with the launch of many of the nine new deals signed since 2006.

So, overall we have a good amount of momentum around most of our businesses. Of course this momentum has been built at a time when economic forecast particularly in areas like retail and housing range from circumspect to bleak. Our eyes are wide open as we look out at 2008 and certainly we all have to be mindful that there will be challenges. But as you see from our news this morning we are not standing still. We expect a highly productive year and a year that will set us up well for 2009 and beyond.

Let’s delve into each of the businesses in a bit more detail and then I’ll ask Howard to cover the financial results and talk more about our outlook. Starting with publishing I’ve mentioned the continued strength at Martha Stewart Living but it goes beyond that as ad revenues overall grew 30% in the fourth quarter and 28% for the full year. Full year page growth topped 19%. During that period we successfully implemented rate increases not only at Living but also at Everyday Food and Body and Soul. Martha Stewart Weddings also continues to perform and as noted we are increasing our focus on this franchise with capital and resources freed up from Blueprints and the WeddingWire relationship entering the picture we’re building a strong offering for brides and marketers alike.

Our books deal with Clarkson Potter continues to roll out as planned based on the strong reception to recent titles like Martha Stewart’s Homekeeping Handbook and Everyday Food, Great Food Fast we’ve added two additional titles to the deal for a total of 12 books. The fourth title under this contract, Martha Stewart Cookies, will be out before the end of this quarter. As a final comment on publishing Living, in particular, is continuing to show strength in the first quarter. That said, you read the same reports I do about the cloudy advertising outlook. Visibility is very limited so while we believe we will continue to outperform the industry and we’ve seen some encouraging signs this quarter, we think it’s prudent to be cautious about looking too much ahead.

Turning to our Internet operations we’re seeing good momentum on a number of levels. Ad revenue was up about 60% in fourth quarter and that’s because we’re giving advertisers a fast growing audience. Page views increased throughout the quarter up 30% year-over-year in October, 40% in November and 50% in December. They’re up another 30+% in January and pacing quite a bit higher than that for February. Unique visitors are also on the rise and people are spending more time on our site as we introduce new formats and new content. Our strength in sales forces is doing a great job improving sell through of our ad inventory and the ad sales component of our deal with WeddingWire will give us more inventory to work with. We’re really excited about the WeddingWire investment and the enhancements it will bring to our Internet business. We’re already a go-to source for ideas and inspiration. With WeddingWire’s tool set engaged couples will now be able to search for and [vet] vendors, plan their weddings and share the experience. We also see great opportunities to leverage WeddingWire’s expertise across our Internet sites bringing similar tools and services to other content verticals.

A stronger digital presence clearly increases the engagement of consumers who value our brands and opens up more creative opportunities for advertisers to reach those consumers. You’ve heard us talk about our 360 Sales Approach that provides integrated programs across our media platforms, it’s one of the key ways we’re addressing the current marketplace challenges. We’re seeing good momentum early this year for programs that cross two or more platforms and our broadcasting segment, which I’ll turn to next, has been a key component in these omni-platform sales.

We’ve often called broadcast the megaphone for the brand and in 2007 we amplified that megaphone. NBC has re-upped the Martha Stewart Show for a fourth season and we increased the reach of the franchise through a deal with Scripps to re-broadcast the show on Fine Living. We’re also tapping our library to produce a series of holiday specials for Scripps and a half-hour crafting show that airs on their DIY Network. Financially our efforts are beginning to bear fruit, excluding the impact of a sizable one-time gain last year we did show positive movement in both revenue and EBITDA in 2007. By retooling the format for the Martha Stewart Show we’ve seen steady increases in revenue from product integrations.

In merchandising our Q4 results included the receipt of our minimum guarantee from Kmart but really for us the main story is all about the new Martha Stewart Collection at Macys. The line rolled out in September and met our goals despite the lackluster holiday shopping season. Our products compete in what is for Macys about a $4 billion category. Our goal is to claim 10% of this category and the initial results hold promise that we can reach that goal within a couple of years. We are particularly encouraged that the higher-end products in the line were among the best sellers. This debunks one notion we’ve heard, namely that Martha might not be able to trade up from the price points in our current mass market business. Further to that point at the end of the quarter we launched our Wedgewood China offering also at Macys and this has been a big hit. In fact it propelled us almost immediately to the number one slot in Macys Bridal Registry.

And that in a nutshell is what our merchandising strategy is all about, building out a broad range of product lines that resonate with consumers. We’ve struck nine such deals in less than two years and many of these new lines have just begun rolling out or are launching in coming months. We saw good results from the first product launch in our Martha Stewart Foods initiative with Costco and this quarter we’ve rolled out a line of foods. Costco’s value proposition clearly gives them an element of resiliency in this soft retail environment so this provides some healthy diversification in our merchandising operation.

We also continue to broaden our crafts business. Crafts is on a positive trajectory and we expect to expand this business significantly with a broad new merchandise roll out in the second half of this year. This is a $30 billion market with no national player and we’re well positioned to play a bigger role in the space. You will see us move beyond the crafting basics and paper products that are performing well into some new categories. This includes special occasions and more seasonal offerings. We had some good success in Q4 with Halloween and Christmas-themed products.

I want to wrap up merchandising by spending a minute on our Martha Stewart Homes initiative with KB Home. Clearly our expectations here have been tempered by the macro environment and we are not factoring a meaningful contribution into our plans for this year, but we’re committed to this partnership and the reason is pretty simple. We generated 228 home sales in seven communities this year despite a dramatic downturn in the housing market. There is clearly a lot of potential here and it’s a deal we remain committed to. While the housing market and a choppy retail sales environment present challenges for our merchandising business, the early success of many of our new initiatives nonetheless points towards good growth in merchandising in 2008 excluding the Kmart impact. Our merchandising business has diversified to a very significant degree and you should see the positive effects of this as we move through the year.

So, as I said at the outset, we have a good deal of momentum in our businesses and we move forward as a profitable business with a solid cash flow generation profile. We will keep a watchful eye on the economy but the popularity of our brands, our business momentum and our strong balance sheets all provide opportunities and we’re going to push ahead in executing on them.

Today’s announcements are a good indication of that. We look forward to welcoming Emeril on board and to the expansion of our weddings business and we are greatly looking forward to the year ahead. Thank you again for joining us and I will turn it over to Howard.

Howard Hochhauser

First let me give you some headlines. Overall we returned to profitability and positive cash flow. Of course we’ve benefited greatly from the Kmart minimum in 2007. More importantly the health of the core business was evident in many ways. We ramped up our advertising business online and reported our first quarter of Internet EBITDA above $1 million. Our merchandising business grew by 142% for the quarter and 51% for the year when you exclude Kmart setting the stage to move beyond our minimum guarantees and deliver upon our goal of creating a portfolio of merchandising licenses. Publishing finished the year with a 28% growth in advertising revenue with the rates growing ahead of pages. So, good news on our core business.

In addition we have started to make good on our promise to deliver growth through smart acquisitions and investments. We entered into a contract to acquire what we feel are the core assets for the Emeril Lagasse franchise including print, online, broadcasting and licensing. This is a business with attractive free cash flow characteristics at a reasonable valuation and, as Susan said earlier, right in our sweet spot of operations.

Lastly we invested in and negotiated a commercial agreement with WeddingWire an important deal that will accelerate the growth of our weddings business. Recall that we currently have the largest newsstand magazine in the category.

Now let me turn to our fourth quarter results. For the fourth quarter of 2007 total revenue was up 22% year-over-year to $118.5 million and our adjusted EBITDA was up 78% to $38.3 million. Publishing revenue while up a healthy 15% over the prior year’s fourth quarter was below our forecast due primarily to a change in timing related to our book deal with Clarkson Potter which will defer approximately $1.8 million of revenue out of the fourth quarter and into the first quarter of 2008. Nonetheless publishing still posted a modest EBITDA profit in the quarter compared with a loss in the quarter last year. Net income per share was $0.63 for the quarter compared to $0.31 in the prior year quarter. Excluding the impact of the deferral EPS would have been right in line with our previous guidance.

Our Internet business generated a substantial improvement in EBITDA reporting $1.3 million in EBITDA compared with $269,000 in the prior year quarter. Revenue grew 34% year-over-year including 60% advertising revenue growth as we benefited from higher traffic and better sell through. We are now fully staffed in this business and do not anticipate any major capital commitments in 2008.

Broadcasting revenue and EBITDA declined on a comparable basis due to a $3.2 million and $2.8 million benefit in 2006 revenue and EBITDA respectively from the termination of a home video distribution deal. Without this one-time benefit in the prior year revenue was up 19% and EBITDA increased by more than $500,000 on higher advertising revenue and a new agreement to re-broadcast the Martha Stewart Living Show on Fine Living TV as well as a deli craft series on the DIY Network.

As expected fourth quarter 2007 merchandising results benefited from the contractual minimum royalty guarantees from Kmart. This payment helped boost merchandising revenue growth 42% when compared with the 2006 fourth quarter. EBITDA was up 46% over the prior year. During the fourth quarter MSLO signed an agreement with KB Home to modify our two contracts related to our Martha Stewart Homes deal. The change provided for a one-time $1 million payment that we will recognize over the next several years with respect to the initial deal in Cary, North Carolina. Closing out this contract simplifies our deal with KB and positions us for good returns on this engagement when the housing market begins to recover. You may recall that our Cary agreement was a test of one community under which we were paid based on a profit calculation. Under the second national agreement through year end 2007 228 homes have closed from the eight open communities that are currently selling.

Looking at the full year results total revenue increased 14% to $327.9 million and our adjusted EBITDA was up 76% to $34.4 million. Net income per share was $0.20 for the year compared to a loss of $0.33 in 2006.

Turning to the balance sheet, we finished the period ended December 31, 2007 with $57.3 million in cash, cash equivalents and short-term investments. We’ve just over $1.00 per share. After taking into account the WeddingWire investment we expect to finish the first quarter with $85 million in cash, cash equivalents and short-term investments. This excludes the Emeril deal currently expected to close in the second quarter. Let me talk about expense management. We continue to take a hard look at expenses across our organization and are focused on running a lean business. Corporate overhead was down in the fourth quarter and part of the benefits stem from our CEO’s willingness to take her entire 2007 bonus in stock. Since December 1, 2007 we have executed on $5 million in annualized compensation savings.

Now I’ll talk about our guidance. The challenging macro economic environment is limiting our forward visibility but our business is fundamentally healthy. We have increased diversity in our revenue streams, particularly in merchandising and many of the categories that comprise our advertising revenue include a broad mix of categories some of which are relatively more resistant to economic pressures. On a consolidated basis we are expecting revenue for the first quarter to be in the range of $66 to $67 million. We anticipate an operating loss in the range of $4 to $5 million and adjusted EBITDA loss in the range of $1 to $2 million. Cap ex should be less than $1 million in the quarter and we do not expect any material tax charges.

On a segment basis for the first quarter publishing is expected to show continued momentum with revenue of approximately $40 million and adjusted EBITDA is expected of approximately $2 million. Advertising revenue is currently trending up at approximately 5% year-over-year when excluding Blueprint. But visibility remains limited. Two points to note. Included in the quarter is an additional $1 million of direct mail spending for Body and Soul relative to the prior year. Additionally we see continued upward pressure on paper prices. We had budgeted a Jan 1 increase of 7% and in fact that is what the industry did. Broadcasting, revenue is expected to be $10 million with adjusted EBITDA of approximately $500,000. Internet is gaining traction with advertising revenue for the first quarter trending up approximately 35% year-over-year. Total revenue will be approximately $3 to $4 million. Revenue related to our Flowers business will transition to the merchandising segment in 2008 reflecting the change to our new program with 1-800-FLOWERS. Adjusted EBITDA loss is expected in the range of $1.5 to $2 million.

Merchandising revenues are expected to be approximately $13 million driven primarily by revenue related to Macys and Costco which did not exist in the prior year period. Adjusted EBITDA is expected to be $7 million. As a reminder the prior year period included a portion of the revenue associated with our relationship with Singer. Corporate expenses are expected to be approximately $9 to $9.5 million

For the full year of 2008 on a consolidated basis we are expecting revenue of approximately $300 million. We anticipate operating income in the range of $9.5 to $14.5 million and adjusted EBITDA in the range of $23 to $28 million. Cap ex excluding any facility changes should be approximately $5 million and we do not expect any material tax charges for the year. In comparing our 2008 revenue outlook with 2007 results it’s helpful to keep a few points in mind. 2008 will not have the benefit of a Kmart true up a difference of approximately $41 million. 2008 will not have any Blueprint revenue which amounted to $7 million in 2007. The upcoming change in our Flowers program which will deliver higher EBITDA and much higher EBITDA margins will result in 2008 revenue being lower by approximately $3 million. Our full year outlook does not include any potential revenue and earnings offside for the two transactions we announced this morning. We will update guidance as Emeril closes and the year progresses but the positive impact of both transactions is likely to begin to show in the second half of the year.

In sum 2008 guidance excluding the impact from the Kmart true up, Blueprint and the change in Flowers and the two transactions implies core revenue growth of about 8%.

Let me talk briefly about the economics of the Emeril deal. This deal is right in line with what we do. Its high margin and asset light providing for great free cash flow characteristics. The assets we are purchasing had approximately $14 million in cash basis revenue in 2007. We estimate year one EBITDA of approximately $8 million. At closing we will provide total upfront consideration of $50 million, $45 million in cash and $5 million in stocks. The deal will have an earn-out providing for an additional payment of up to $20 million based on 2011 and 2012 EBITDA. Consideration for the payout is payable up to 40% in stock. We estimate we will have cash on hand of approximately $85 million at March 31 prior to closing of the deal.

In closing 2007 and 2008 represent an inflection point for MSLO. In 2007 we put the tools in place to build revenue growth, generate sustainable cash flows and maintain profitability. In 08 we will work to deliver on those initiatives and position our business for strong long-term performance.

Thank you and we will now turn it back to the Operator for Q&A.

Question-And-Answer Session

Operator

The floor is now open for questions. (Operator Instructions) Your first question comes from David Kestenbaum of Morgan Joseph.

David B. Kestenbaum – Morgan Joseph

Follow up on the deal that you announced today. When you said $8 million EBITDA year one, is that calendar 2009? Is that the way to think about it or middle of this year onto middle of next year?

Howard Hochhauser

It’s a run rate estimate based upon the timing so it’s not 09. It’ll kick in once we close.

David B. Kestenbaum – Morgan Joseph

And are there synergies –

Howard Hochhauser

And just to be clear that’s for a 12-month period.

David B. Kestenbaum – Morgan Joseph

Are they synergies on top of that you’re going to be able to achieve through the deal

Susan M. Lyne

It’s a well run, lean company. That said, we’ve built a strong infrastructure here that we know we can leverage without any further investment so we do believe there is a greater revenue upside and EBITDA upside than a cost savings upside here. This is really about growing a business. All of his businesses are in exactly the same areas ours are, publishing, TV, Internet, licensing. We think there’s a big licensing opportunity here. He’s got some great ideas and we also think that there are ways to integrate Emeril into some of our own brands like Everyday Food that will actually allow us to take that magazine to a new level. So I think we’re looking at more revenue upside, that $8 million of EBITDA is based on his current operations, not on what we can add to that or bring to the party.

David B. Kestenbaum – Morgan Joseph

What kind of top-line -

Howard Hochhauser

David, you cut out. What’s up? Assuming you’re still healthy I think you were asking about the top line. On his cash basis numbers it’s about $14 million in top-line revenue for the prior year. That’s cash basis and not GAAP basis. Let’s go to the next question. I think he may have gotten disconnected.

Operator

Your next question comes from Michael Meltz of Bear Stearns.

Michael Meltz – Bear Stearns & Co.

On Emeril and then I have three follow ups. Can you give us a sense of the employment contract that you expect to accompany this deal?

Howard Hochhauser

Yes, there’s two important points to look at. One is the earn out is 2011 and 2012 which takes this deal out, it gets some teeth into the future. As it relates to Emeril specifically he has signed a 10-year employment agreement with MSO.

Michael Meltz – Bear Stearns & Co.

And is there in that $8 million of EBITDA is there a annual pay based in that number?

Howard Hochhauser

Yes, that’s a fully baked number which includes Emeril, his business deputy Tony Cruz and the other employees.

Michael Meltz – Bear Stearns & Co.

In the quarter, can you tell us what the Kmart sales trends were on a total sales and a comparable store basis please?

Howard Hochhauser

Yes, give me one minute. So Q4 total sales were down about 18% and a comp store basis it’s 17% for the fourth quarter.

Michael Meltz – Bear Stearns & Co.

Can you tell us what Martha Stewart Living ad revenues – I guess you gave us ad revenues. Can you give us circ for the period and total publishing group ad revenues for the period? Percentage change, Howard.

Howard Hochhauser

I’ll go to circ revenue. Let me talk about circ units for a minute. Circ, and Wenda could jump in after me, but we just increased the rate base of all three titles. MSO is now at 2 million, Everyday Food is at 9 million and Body and Soul increased to 550. So having said that, let me provide you with the circ revenue numbers. MSO is generally flat and the group in total on a revenue basis is generally flattish, on a revenue basis.

Michael Meltz – Bear Stearns & Co.

And the group ad revenue?

Howard Hochhauser

And the group ad revenue is up 30% for the quarter year-over-year.

Michael Meltz – Bear Stearns & Co.

Secondly, or lastly I guess, on WeddingWire, if you’re saying you’ll be roughly $85 million at the end of March, are you saying – and that includes the Kmart catch up – so is this like a $10 million investment?

Howard Hochhauser

No, it’s – Well, we’ll file with our 10-Q what the investment is. For competitive reasons we don’t want that number to get out there but it’s in the single digits.

Michael Meltz – Bear Stearns & Co.

And lastly at the publishing group on the margin side, I know to shut down Blueprint and then there were some other headcount reductions there during the quarter, is there any nonrecurring costs in that number, that depressed margin in the quarter?

Howard Hochhauser

Yeah, the biggest item that impacted margins truthfully was the change in the timing related to Clarkson Potter. That was all margin, that came out of Q4 and that gets put into Q1 so that was $1.7 million, $1.8 million of revenue and of EBITDA. We had some minor costs related to the shutdown of Blueprint.

Operator

Your next question comes from Richard Tullo of Sidoti & Company.

Richard R. Tullo – Sidoti & Company, LLC

Couple of questions in regard to this Emeril transaction. Evidently he’s got a couple shows on Food Network. What’s the status of those contracts there and can you send old shows to – can you resell old shows?

Susan M. Lyne

Emeril is still very much a part of the Food Network. I think they are enthusiastic about his continued participation there. Emeril does own the underlying assets of the shows. There is a holdback on syndicating them while he is still at the Food Network so I don’t think you should anticipate anything happening with those television programs domestically in the near term although we do believe there is an international upside here. He has never syndicated his shows overseas and that’s obviously something we will move on pretty quickly. But he is eager to remain on television and there may be other television opportunities as well.

Richard R. Tullo – Sidoti & Company, LLC

And so are you getting any percentage of the revenue from the shows that are going to appear on –

Howard Hochhauser

Let me jump in financially. Upon closing he will have to assign his contracts to us, that’s a condition of closing. Upon the assignment MSO books the revenue associated with television, licensing, Internet, all of his assets that exclude the restaurant business naturally.

Richard R. Tullo – Sidoti & Company, LLC

So basically you get what he gets?

Howard Hochhauser

That’s correct and then he becomes an employee of MSO under his 10-year agreement. We will pay him a salary and a bonus and that’s baked into the number we provided.

Richard R. Tullo – Sidoti & Company, LLC

And what’s his contract with the Food Network? How long?

Howard Hochhauser

He has a contract that goes through – there’s two independent contracts and we’re actually, or he is, negotiating with Scripps as we speak. Part of that is a condition of closing so for competitive reasons I just don’t want to get into it on the call.

Richard R. Tullo – Sidoti & Company, LLC

Fair enough. And then in regards to the food contracts, or the food merchandise, is that a pure royalty business and do you know what percentage he gets at retail?

Susan M. Lyne

He runs his business the same way we do, it is a licensing model, it’s a very high margin business and I think you can assume that his royalties are pretty much in line with ours.

Richard R. Tullo – Sidoti & Company, LLC

And is he currently publishing any cookbooks or any magazines or something where you can leverage your publishing?

Susan M. Lyne

He has published 14 cookbooks, I believe. Obviously we think there is a lot of opportunity in that book publishing arena and as I said, I do not think that we’re looking at launching new magazines with him but we do believe Emeril can play a significant role in some of our magazines and help us build both the fan base and the awareness of some of our newer titles.

Operator

(Operator Instructions) Your next question comes from David Bank of RBC Capital Markets.

David Bank – RBC Capital Markets

A couple of questions, three our four, the first pertaining to advertising. Can you guys highlight categories that you’re seeing particular strength or weakness in across all the platforms and how that might have changed from the last time you spoke to us?

Susan M. Lyne

I’m going to let Wenda speak to that.

David Bank – RBC Capital Markets

Okay, great. The second is I’m not sure if it’s just a seasonal deceleration, but it looks like on the web traffic you saw a little bit of a deceleration, January versus December and Wenda you could speak to that. Then two more questions, if you could bear with me. The third one is on the WeddingWire deal what is the impact to the income statement of that transaction and what’s the business model for WeddingWire? It looks almost like a lead gen business and can you give us a little bit more color about that? And then last, I think to follow up on the last question, I believe that Emeril Live! was cancelled so how much of a contributor was that to the revenue run rate for last year that you gave us and is that sort of all factoring into the numbers and do you expect to bring Emeril Live! to some other channel? Is that factored into the $8 million of EBITDA run rate? Thanks and sorry for so many questions.

Wenda H. Millard

I’ll start out on your category question. As you know the core category for, certainly for Living and Everyday Food, is the consumer package goods category which continues to be our mainstay but a focus of our field efforts for 2008 will be to diversify the revenue that comes from categories that will include travel, financial, consumer electronics or technology, luxury and beauty. So there is a focus now outside the core which we’re very, very excited about. So that’s where we are from a category standpoint. I think your second question was –

David Bank – RBC Capital Markets

I’m sorry, Wenda, but in terms of strength or weakness within those categories right now, is there anything that in the context of the macro economy, anything behaving really well, anything behaving kind of weak? You carved out the categories.

Wenda H. Millard

Yes, on both counts. So first of all what we’re seeing in the CPG category is a bit of an unusual phenomenon in that those companies, the Proctors & Gambles of the world, the Kelloggs, the UniLevers, have tended in the past to plan on an annual basis and in 2008 it appears that they are not planning annually, they’re planning is slower and in many instances it is by quarter and that’s where we have a challenge in visibility. So that’s a difference in CPG. There were also several of them off to a slow start in Q1 and again, that’s an industry statement that occurred for everybody in the publishing world.

David Bank – RBC Capital Markets

Off to a slow start in terms of the annual buys or within the actual quarter maybe not spending as much as you had expected? Maybe industry wide.

Wenda H. Millard

Within the actual quarter they were slow to commit and of course with the lead times on publishing there’s not a lot of opportunity to quickly recoup. On the upside if you just go through for example Living Magazine, we’re very excited about the commitment that we’ve seen from of all things the financial services category. So we’re very, very pleased to welcome Wachovia for example to our pages. Nice increase from City and so that is an area that we’re excited about and that they – a market segment that seems to be excited about us. We have also made some inroad into what you would call the luxury category, Ralph Lauren support is very exciting. I think you probably saw that in the January issue as well as a couple coming up. So those are categories that we’re very excited about and as I said they seem to be excited about us too. So that’s a good thing.

David Bank – RBC Capital Markets

And on the sequential December versus January traffic?

Wenda H. Millard

Slight dip, but that’s very normal not only in anybody’s Internet business, quite frankly, but if you think about the franchises that we are so strong in. One of them certainly is holiday and we saw some wonderful numbers as you heard from Howard and Susan, in Q4 on the web and so a natural fall off into January is to be expected. Although I must say, as Howard said, the numbers for January are pretty exciting as they are for February. All great things there.

Susan M. Lyne

I think the more important indicator for January and February is the year-over-year increases because there are obviously going to be Q4 spikes but if you look at year-over-year January’s up more than 30% and February as I said is trending significantly higher than that.

Howard Hochhauser

Let me take your WeddingWire income statement and Emeril question. Taking Emeril first, we had known about that Emeril Live! deal, so the $8 million excludes Emeril Live! and is based upon the asset that he has today on a go forward basis. Having said that, there are still other TV opportunities out there that he’s in negotiations with. With respect to the impact on the WeddingWire income statement, there’s two separate impacts. One is the commercial agreement which has a, on our consolidated basis, a potential revenue and EBITDA impact which is not in our guidance. And then separately you have –

David Bank – RBC Capital Markets

I’m sorry, can you say that one more time, Howard.

Howard Hochhauser

We have a commercial agreement where we get to put their tools and technology on our website. We’re going to sell some of the advertising. Wenda may want to talk about that. So that impacts our reported Internet revenue, our reported Internet EBITDA, but we are not consolidating the financial statements of WeddingWire. So they’re loss we will pick up just under 40% of their loss as an equity income line under EBITDA in our income statement.

David Bank – RBC Capital Markets

I guess it follows that then why buy 40% of it?

Howard Hochhauser

The way the deal is structured is such that we could get in here, get this technology, get the [inaudible] in place and have a – I would call it a preferential option, if you will on acquiring the rest of the business.

Susan M. Lyne

Let me just add one other thing here. One of the things we’re buying here is the talent of these founders. We want them engaged and we want them to still have the significant upside to grow this business so the 40% number is a good way to do that. As Howard said there is a path to full ownership but in the meantime we’ve got a great tech team who are very nimble and who are excited about not just what they can do for our Weddings business but also about adapting some of this technology, vendor search and all these tool sets for other content verticals. So it’s a well structured deal I think.

Operator

Your next question comes from Michael Kupinski of Noble Financial

Michael Kupinski – Noble Financial

Thank you for taking the question but first I wanted to congratulate on your acquisitions. I think it’s an important step to broaden the company and I congratulate you. How was Emeril introduced to the company and what his motivation for his sale?

Susan M. Lyne

This came to us through Charles [Koppleman]. Charles has known Emeril since the early 90’s. In fact one of his annual outings with his grandchildren has been to take them to the Emeril TV show. They’re huge fans and interestingly Emeril does have a big fan base among kids, a secondary fan base let’s call it and while he was there over, I think it was over the summer, he talked to Emeril and Emeril asked him to have a breakfast with him so he could just talk about where his business was going and see if he could get some thoughts from Charles and Charles took the opportunity to suggest an alternative option. Emeril never marketed the company, he was not out there trying to sell it, this really came to us through a personal relationship.

Michael Kupinski – Noble Financial

What has been the revenue growth of Emeril over the past three years and what is baked into your revenue growth number for 2008 with the expectation of that $8 million in EBITDA?

Howard Hochhauser

He prepares his financial statements on a cash basis effectively as you would as an individual taxpayer and that’s what you base your evaluation on, on cash received. So on a go forward basis we have to convert that to a GAAP basis financial statement. We are in the process of doing that, we have to file that win 71 days of closing so we’ll provide that upon filing our AK, 71 days after closing.

Michael Kupinski – Noble Financial

And then from the $14 million, I suppose that you said it was for 2007, what was your revenue growth number for 2008?

Howard Hochhauser

Again, I don’t want to provide – that includes a mix of cash and GAAP basis. We will provide all of that when we file the financial statements.

Michael Kupinski – Noble Financial

How do you plan to integrate Emeril at this point? Will it be stand-alone company or do you plan to report it as separate business segments, both along the lines of Martha Stewart’s business lines?

Howard Hochhauser

It’ll roll up. Merchandising revenue will roll up within merchandising, broadcast within broadcasting. We will not have a fifth segment if you will, as Emeril.

Michael Kupinski – Noble Financial

Will you be breaking out those segments for us on a year-over-year basis, or pro forma basis? I was just asking whether or not you’re going to give us pro formas along the business line on this?

Howard Hochhauser

Yes, yes, yes. Once we close and as we book it we will be transparent and tell you what the growth is coming from the Emeril business, absolutely.

Michael Kupinski – Noble Financial

Okay. Can you discuss the metrics that would allow for the $70 million earn out for the acquisition? You said it was on a cash flow basis, is there a specific level of cash flow that you’re looking for?

Howard Hochhauser

It’s a EBITDA number that, as you can imagine, has growth baked into it. And again, we’ll provide that when we file the closing documents.

Michael Kupinski – Noble Financial

You indicated that there was a revenue deferral from the Clarkson Potter book in the last quarter. Can you discuss what were your expectations for the fourth quarter Clarkson books revenue and what type of deferral you saw in the first quarter?

Howard Hochhauser

Yeah. It relates to book five under what is now a 12 book deal with Clarkson Potter. Had book five been accepted in Q4 we would have recorded the revenue. In fact, it now looks like book five will get accepted in Q1 so the cash has actually been received and sits on our balance sheet but, for accounting purposes you record the revenue when it is formally accepted. In fact, they actually already have the manuscript but the formal acceptance will come in Q1.

Michael Kupinski – Noble Financial

And what was that revenue component? Can you give us some color on that.

Howard Hochhauser

It’s a $1.8 million.

Operator

Your next question comes from David Kestenbaum of Morgan Joseph.

David Kestenbaum – Morgan Joseph

You said that Macys met all your goals. Can you just quantify that maybe a little bit more? And also on Costco how my SKUs are you up to? And, just talk a little bit about the progress there.

Susan M. Lyne

I’ll let Robin speak more about this but we are really restricted by our partnership with Macys from breaking out the sales on our business so I can’t give you an exact number. That’s why we tried to indicate that we were very happy with our sales just by saying we had met our goals and by saying that it does give us some comfort about that goal we had set for capturing 10% of their home business. That said, I think maybe Robin can give you a little more color on what we saw moving most quickly and maybe where we see some potential expansion or upside going forward.

Robin Marino

Well, we saw considerable strength at Macys in all of our best categories as well as our opening price point categories. We also believe that we have a really, really great opportunity within the bridal category. As Susan mentioned earlier, as soon as we launched Waterford Wedgewood, within 10 days we moved into that number one slot there. And, all bridal related product categories across all businesses have performed very, very well for us at Macys. Overall, we’ve gained a lot of valuable learning and we think that we have a great opportunity going forward. With respect to Costco, we launched in December with a ham, followed up in January with soups and over the course of 2008 our plans are to expand our offerings into about 10 food categories and we’ve seen a great response there and our plan for the year David, is to have about anywhere between 22 to 28 SKUs.

Operator

At this time I would like to turn the floor back over to management for closing remarks.

Howard Hochhauser

Thank you everybody for attending. We look forward to speaking with you on our first quarter call. You may now disconnect.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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