Crown Media Holdings, Inc. Q4 2007 Earnings Call Transcript

| About: Crown Media (CRWN)

Crown Media Holdings, Inc. (NASDAQ:CRWN)

Q4 2007 Earnings Call

March 12, 2008 11:00 am ET


Henry Schleiff - President and CEO

Brian Stewart - Executive Vice President and Chief Financial Officer

Mindy Tucker – IR


Alan Gould - Natexis Bleichroeder

[Saul Wheel – SM Investments]

Marguerite Wagner – Mutual of America


Good day ladies and gentlemen and welcome to the Crown Media Fourth Quarter Earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference please press * then 0 on your touchtone telephone.

As a reminder, this conference call is being recorded.

I would just like to take a few moments to remind everyone the statements made on this conference call may be forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act and are based on management’s current expectations, estimates and projections. Forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from those projected or implied in the forward-looking statements. Such risks and uncertainties are detailed in the company’s filings with the Securities and Exchange Commission including the risk factors included in the company’s 10K report for the year ending December 31, 2007.

I would now like to turn over the program to Mindy Tucker. Please go ahead Mindy.

Mindy Tucker

Thank you. Good morning everyone and welcome to Crown Media’s Fourth Quarter conference call. With me today are Henry Schleiff, Crown Media’s President and Chief Executive Officer and Brian Stewart, Executive Vice President and Chief Financial Officer. Henry and Brian will make some comments about the operating results and financial performance for the quarter and the full year of 2007. Then we’ll open up the call for your questions.

I’d like to remind everyone that our press release which contains information on non-GAAP measures was distributed earlier this morning and is available through the investor relations section on our website at In addition, our 10K will be filed some time later today.

Now I’d like to turn the call over to Henry Schleiff. Go ahead Henry.

Henry Schleiff

Mindy thank you. Good morning everyone and thank you for joining us today. We completed 2007 on a very high note delivering a fourth quarter filled with tremendous rating increases, the renewal of an important distribution agreement and the positive effects of an extremely robust market advertising for us.

All of this finished up a year of record achievements and has been followed up by further strong results and important accomplishments in the first quarter of 2008. The strength and appeal of our brand continues to resonate with our viewers who tuned in in record numbers, with our advertisers whose demand drove double-digit increases in revenues and with our distribution partners who have come to the negotiating table understanding the importance in value of the Hallmark Channel to their subscribers.

We offer family friendly programming with positive and wholesome stories which are in short supply on television today and which are in great demand by our baby-boomer audience, an audience growing both in size and buying power.

We deliver this on Hallmark Channel and Hallmark Movie Channel and we deliver it with quality as demonstrated by the strong reputation we have built in the marketplace. This reputation and brand have been translating into the very positive operating results which I have reported to you in the past and which I will report to you again today.

In terms of ratings, as I mentioned, we had an outstanding fourth quarter providing a strong finish to the year and once again demonstrating that without a doubt Hallmark Channel is now well established as a top-ten quality entertainment cable network and the number one destination for holiday programs and original movies.

Let’s start by noting that in 2007 Hallmark Channel delivered its highest year, quarter, month, week and day in our network’s history. The fourth quarter delivered record results on many levels including our all time highest rated quarter in primetime and total day household delivery ranking six in primetime and eight in total day among the 69 Nielsen measured ad supported cable network competitors.

The channel also had its highest quarter for total day delivery of women 25-54 and of adults 25-54. Looking at the month of December, it was Hallmark Channel’s highest rated month of all time in primetime and total day. We ranked in 8th in primetime and 9th in total day.

The month was also our highest month in terms of primetime and total day delivery of women and adults 25-54.

Finally, December delivered our highest rated week and day in primetime and total day and marked the 19th consecutive month that Hallmark Channel has earned a position as a top ten cable channel in primetime.

Our success is directly related to the strength and appeal of our original and theme programming which continues to have a special draw for our audience especially for the winter holidays. For the holiday season 2007, Hallmark Channel averaged an incredible 2.3 household rating beating competitors like Lifetime, ABC Family, USA and others. This marked our second year as the number one destination for holiday weekends at this time of the year. For three straight weeks our holiday original premier’s on Saturday night were the number one ranked primetime program of the day. Specifically A Grandpa for Christmas with Academy Award winner Ernest Borgnine delivering a 3.2 household rating, followed by All I Want for Christmas delivering a 3.1 household rating and The Note with Jeanie Francis earning a 3.4 household rating.

In terms of momentum, we delivered an increase of 17 million household viewers in December as compared to November. These results are simply remarkable and a strong testament to our ability to deliver brand defining quality programming with heart warming stories. These form the basis of every one of our original movies. Quite frankly our kind of emotionally touching movies are virtually all that we produce. They are found in less and less supply on television today but are increasingly demanded in homes across America.

Since our re-launch in 2001, our production of original movies has delivered double-digit increase in ratings each and every year. I should emphasize here that we have achieved these ratings growth with an incredibly cost effective business model, meaning we don’t acquire expensive feature movies in their first television window and we don’t engage in the hit or miss production of expensive one-hour dramas or sitcom’s.

In point of fact in 2007 Hallmark Channel accounted for more than 25% of all original movie hours on ad support cable, which led the network to its ranking of 8th in primetime for the full year.

In that regard, 2008 has gotten off to an extremely positive start, taking advantage of the extraordinary rating success we experienced through 2007 especially in the fourth quarter. We have just delivered our highest rated January and February in the network’s history, remaining in the top ten for both months in primetime and total day.

Our original movies continue to support this performance with the January premier of The Good Witch delivering a phenomenal 3 point household rating and the February premier of Bridal Fever delivering a 2.2 household rating.

We have added the popular and successful family series Seventh Heaven thereby attracting a younger female audience. Additionally our ability to reprogram our Sunday morning schedule since the recent expiration of our programming commitment to the NICC has generated a significant ratings boost in this important time slot.

February represents the 21st consecutive month Hallmark Channel ranks in the top ten in primetime.

With the lineup we have in place for the rest of 2008, I am confident that we will continue to deliver this consistently strong performance. We are particularly enthusiastic about our summer schedule kicking off in May with new installments of our Murder Mystery Movie Series featuring Dick Vandyke, Lea Thompson and John Larroquette and the premiers of exciting originals starring exceptional talents such as Jacqueline Bisset, Darryl Hannah, Armand Assante, Academy Award winning actors Vanessa Redgrave and Maximilian Schell, as well as specials with the ever-popular Regis Philbin.

Of course no discussion of the upcoming year would be complete without the mention of the upcoming launch of Hallmark Movie Channel in High Definition, a state of the art cable network featuring the greatest family movies of all time.

Hallmark Movie Channel HD will be dedicated to bringing viewers a mix of classic theatrical feature films, presentations of the acclaimed Hallmark Hall of Fame Library, the very best of our own Hallmark Channel original movies and a variety of special events. By the way, Hallmark Hall of Fame movies will appear every Sunday night in primetime where they will be the exclusive destination for the High Definition premier of these award-winning programs which have been one of the very cornerstones over the years of the Hallmark brand.

This new channel will also spotlight a major quarterly programming event such as the 4-hour miniseries Son of the Dragon starring David Carradine. Indeed the April 2 premier of this miniseries will mark the launch of Hallmark Movie Channel High Def offering audiences an unparalleled viewing experience.

We are also expanding into other areas of the digital world and attracting a younger audience. Just this past January, Hallmark Channel delivered its highest website audience ever beating Lifetime and putting us on par now with ABC Family and TNT. I should also note here that our website audience has a very attractive, upscale profile with a median age of 49.

Also in January we teamed up with Limbo, the world’s largest mobile entertainment community, creating our first ever mobile interactive initiative in January in connection with the premier of The Good Witch. These are modest beginnings, but certainly demonstrating our ability to tap into all forms of media and alternative platforms to create increased awareness and extend the viewer experience for our audience.

Let’s talk a little bit about distribution. Our results in terms of distribution have been equally remarkable. We started this year with 75 million subscribers and ended with 84 million, an addition of over 9 million new subscribers, or 12% through the year. The addition of average of nearly 800,000 every month represents the fifth largest year-to-year subscriber increase among all 80 measured cable networks. The rate of growth is a particularly significant accomplishment given our establishment as a fully distributed national network.

Our growth comes from many sources including repositioning into a more fully distributed tier on Echo Star, new system launches on our cable distributors as well as organic growth on existing systems – most notably with the Telco’s and satellite distributors. During 2007 Hallmark Channel gained nearly 1 million sub’s alone just from Verizon.

Certainly the most impressive news in this area has been our tremendous success in renewing our major distribution agreements on favorable terms and far ahead of the time schedule that is customary in this industry for such renewals. These are extremely complicated deals and I know the assumptions by many were that we had little leverage in these negotiations and that would just be fortunate to renew them at all and at best that they would be renewed later this year or next, well after the expiration of their contracts. Accordingly, I am very pleased to say that our distribution partners have been very fair and reasonable in recognizing the value of Hallmark Channel and very responsive to the persistence of our extraordinary distribution team.

In December 2007 we announced the renewal of our distribution agreement with Comcast, which accounts for over 22 million Hallmark Channel subscribers and now provides for the opportunity to distribute Hallmark Channel both in High Definition and standard definition. Earlier in the year we secured the renewal of our agreement with Echo Star providing carriage of Hallmark Channel as well as Hallmark Movie Channel and providing us the opportunity to distribute Hallmark Movie Channel in High Def. This agreement resulted in the addition of 4 million new subscribers for Hallmark Channel and 4 million new subscribers for Hallmark Movie Channel.

Finally, in 2007 we secured distribution for Hallmark Channel and Hallmark Movie Channel with NCTC, whose members currently account for nearly 7 million subscribers.

This year in January we announced the renewal of our distribution agreement with Time Warner, which accounts for 13 million Hallmark Channel subscribers and provides the opportunity for distribution of Hallmark Movie Channel in High Def and standard def.

Finally, just last week we announced the renewal of our distribution agreement with DirecTV, accounting for nearly 17 million Hallmark Channel subscribers which also provides the opportunity for distribution of Hallmark Movie Channel in both standard and High Def.

In total, these renewals will contribute to the continuing growth in our subscriber revenues and although we still believe that Hallmark Channel is undervalued relative to its competitors, we are pleased with the rather substantial progress that we have made here. Indeed, a year ago people legitimately asked, “Over 60% of your base is up for renewal. Will you get renewals and will they be at fair prices?” With the conclusion of this hat-trick of Comcast, Time Warner and now DirecTV, along with the other renewals mentioned above I believe we have provided a clear and definitive answer to these questions.

It is an accomplishment of which we are quite proud and which underscores the fundamental current value of Hallmark Channel and Hallmark Movie Channel.

So what is ahead for 2008? While we will now certainly turn our attention to the renewal of our distribution agreement with Cable Vision, which accounts for some 2.2 million Hallmark Channel subs, I think the most exciting story for 2008 will be the expanded distribution of Hallmark Movie Channel. Clearly with over 8 million subscribers, Hallmark Movie Channel was an important element in our renewal discussions.

In an August beta research study, Hallmark Movie Channel ranked number one among both adults who are highly interested in HDTV and adults who currently subscribe to HDTV service. As I mentioned earlier on April 2, we will be launching the High Def version of Hallmark Channel. This will be the home of the greatest family movies of all time, offering distinctive stories with important messages by a unique programming line up that will be available only on Hallmark Movie Channel with classic theatrical feature films like Annie, Flubber, Old Yeller, Hallmark Hall of Fame award-winning originals, the very best of Hallmark Channel original movies and a variety of event specials. This is a unique and winning combination. Moreover, it is one which I am confident will enable us to secure carriage for Hallmark Movie Channel on systems throughout the country.

Let’s talk a little bit about advertising sales. Our strength and success in programming and distribution have certainly contributed to the fantastic growth we have had with our advertising revenues. For the fourth quarter, our advertising revenues increased 21% over the fourth quarter of 2006 including an incredible CPM increase of 83% in the scatter market over our upfront rating.

For the full year, advertising revenues were up 18% over 2006. This represents an overall revenue increase in the scatter market over the upfront rate. Hallmark Channel added over 50 new advertisers, representing growth in several important industry sectors. We have been particularly successful in expanding our regular customer base in the entertainment industry to include Paramount Pictures, Warner Bros. and 20th Century Fox; in the financial services sector with Washington Mutual and State Farm Insurance; in the retail industry with TJ Maxx, Marshall’s and Wal-Mart and in the restaurant sector with Long Silvers. We are also successful in attracting advertisers to Hallmark Movie Channel which now has a roster of its own, 33 blue chip, and Fortune 500 advertisers.

We received a clear indication of our growing appeal to advertisers in the calendar up line process which we completed in December. During this we closed nearly $12 million in deals, a 23% increase over those booked in the 2007 calendar up front and an 11% increase in the CPM’s.

We closed agreements with 18 advertisers, an increase of six over last year, bringing new advertisers including RBC World and Edward Jones. As is typical, this is a small percentage of our sales than the traditional up front sales which occur some time between June and August, before the beginning of the broadcast season. Nevertheless, we are very pleased with our success here and well positioned as we begin to plan our strategy for the 2008/2009 up front sales process.

As I had previously reported research results for Hallmark Channel go a long way in supporting our selling efforts. For the full year, 2007, and for each quarter Hallmark Channel was number one in primetime C3 viewer retention. This is a new industry standard referring to the number of commercials viewed during the live broadcast of a program plus time shifted viewing for an additional three days. Our industry leading average is an astonishing 97%, which means that an average 97% of the viewers of any one of our programs stay through its commercials.

Hallmark Channel also ranked number one in 2007 in primetime for length of tuning which means that our audience watched us for longer periods of time than any other cable network. Moreover, in the December 2007 opinion research study Hallmark Channel ranked number one among all ad supported cable entertainment networks with viewers who feel more positive about a company, product or service because it advertises on Hallmark Channel. Indeed according to a 2007 [Meyer’s] Ad Exec survey, Hallmark Channel is now the number one network among advertising executives for providing a trusted environment for the sales, products and services.

It should be emphasized that we are getting these kinds of results especially because of our targeted baby-boomer generation audience, an audience of those 40 and over who are watching more hours of TV while those less than 40 are watching less hours of TV. The importance of this to advertisers is due to the size and wealth of this audience. An audience with assets, not just allowances.

Given all these facts and our results, it is not surprising that Hallmark Channel has experienced double-digit growth in advertising revenues since its re-launch in 2001 and that we expect to continue this trend well into the future.

Now I would like to turn things over to our CFO, Brian Stewart.

Brian Stewart

Thank you very much Henry. As Henry mentioned, fourth quarter 2007 was another quarter of record setting ratings and concluded a year of tremendous ratings and distribution growth and that performance is reflected in our financial results. Before going into the financial details I would like to share another fourth quarter success in the results of our calendar year advertising sales up front.

During the calendar year advertising sales process which concluded in December, we closed nearly $12 million in deals, a 71% increase over the amount of calendar year agreements closed in last year’s calendar up front. We closed agreements with 18 advertisers, an increase of six over last year, and these agreements were done at CPM increases of 11% over the 2007 calendar year deals.

So now for the financial results. For the three months ended December 31, 2007, fourth quarter 2007 revenue of $69.6 million was up 19% from $58.4 million in the fourth quarter of 2006.

Advertising revenue increased in the fourth quarter of 2007 to $63 million, up 21% from $52 million over the same period in 2006.

Our higher ratings increased CPM’s with fourth quarter scatter rates up over 80% from last year’s up front pricing and increased distribution have all contributed to this continued significant increase in advertising revenue.

Total subscriber revenue of $6.4 million was up 3% from the fourth quarter of 2006. As we had previously indicated would be the case, subscriber revenue growth in the fourth quarter was nominal given limited subscriber growth and few contractual rate increases in the quarter. Our fourth quarter revenue was higher than the same period of 2006, resulting from increased subscribers at higher rates from agreements renewed throughout 2007.

For the 12 months ending December 31, 2007, total 2007 revenue was $234.4 million, up from $201.2 million in 2006, an increase of 16%.

2007 continued Hallmark Channel’s history of significant advertising revenue growth and marked the sixth straight year since the channel’s launch that advertising revenue has increased 18% or more.

2007 advertising revenue increased to $206.2 million from $174.2 million in 2006.

Total 2007 subscriber revenue at $27.8 million was up 12% from 2006 subscriber revenue of $24.9 million. Again, reflecting increases in subscribers and rates and reductions from gross revenue related to the amortization of subscriber acquisition fees.

On the expense side, total cost of services for fourth quarter of 2007 was $51.5 million compared to $53.1 million for the fourth quarter of 2006, an increase of 3%. Within cost of sales, programming expenses of $39.9 million decreased 19% from the year earlier quarter, but recall the fourth quarter 2006 programming expense included a $16.4 million write down of NICC programming assets reflecting the NICC’s decision to cancel Crown’s rights to certain programs.

Adjusted for these non-cash NICC programming items, programming expenses increased about 20% from the fourth quarter of 2006 to fourth quarter 2007. The 2007 increase in programming expense resulted from increases in original and acquired programming expense and increased expenses related to rights pertaining to the Crown Media library sale for use on Hallmark Movie Channel.

SG&A expenses for the quarter of $21.6 million increased from $11.3 million in the fourth quarter of 2006. This increase resulted from primarily from approximately $8.1 million of expenses related to the termination of our programming agreement with the NICC.

Marketing expenses in the fourth quarter of 2007 increased 10% to $7.9 million from $7.2 million in 2006.

EBITDA loss for the fourth quarter of 2007 totaled $830,000 compared with an EBITDA loss of $9.7 million for the fourth quarter of 2006.

Cash provided by continuing operating activities totaled $15.3 million for the fourth quarter of 2007 compared to cash using continuing operating activities of $12.6 million for the fourth quarter of 2006.

The net loss for the fourth quarter was $37.3 million or 37 cents per share, versus $30 million or 29 cents per share in the fourth quarter of 2006. Recall that the fourth quarter of 2006 included an $18.2 million gain related to the sale of our film library.

For the twelve month period ending December 31, 2007, cost of services totaled $202.5 million compared to $436.2 million in 2006 cost of sales that included a total impairment charge of $225.8 million. Total programming costs for the year ending December 31, 2007 increased 8% from $152 million to $164 million.

SG&A expenses increased $61.4 million for the year ending December 31, 2007, from $43.8 million in 2006.

The 2007 increase resulted primarily from $7.8 million increase in compensation expense related to the company’s restricted stock compensation plan really resulting from fluctuations in the company stock price and approximately $8.1 million related to the termination of the NICC programming agreement.

One quick note on the NICC programming agreement you will see on our financial statements on the balance sheet of December 31, 2007 there is a liability related to the NICC quit agreement. That quit agreement as we have disclosed in subsequent 8k’s, was terminated in 2008. However, for FAS 140 purposes we have disclosed that NICC quit as a liability on our balance sheet at 12/31 even though it has been subsequently terminated in 2008.

EBITDA loss for full year 2007 totaled $11.3 million versus $16.5 million in 2006. 2007 cash provided by continuing operating activities totaled $12.6 million versus a use of cash of $34.1 million for full year 2006. The net loss for 2007 was $159 million or $1.53 per share, compared with $389 million or $3.71 per share in 2006.

Let’s talk a moment about our liquidity. Throughout 2007 we used cash provided from operations to reduce outstanding indebtedness under our revolving credit facility and we ended 2007 with approximately $69.5 million borrowed under the facility compared to a 12/31/06 balance of $87.6 million.

We have extended the term of our credit facility through May 31, 2009 and the facility now includes J.P. Morgan as the sole lender. The commitment level of the facility of $130 million has been initially reduced to $90 million with additional scheduled reductions in 2008 to $60 million on June 30, and $50 million at September 30, 2008.

Additionally, Hallmark Cards has extended the terms of the labor and standby agreement related to all of this outstanding debt and thereby agreed not to demand payment on this debt until March 31, 2009. Hallmark has extended the deferral of cash interest until November 17, 2008 at which time cash interest will become due on the 2001, 2005 and 2006 notes, though not first payable until January 2009.

Given the changes to our business resulting from the new distribution agreements and the termination of our NICC programming agreement we though it would be helpful to provide some guidance for the next couple of years.

Our continued ratings success and the successful completion of the renegotiation of our largest distribution agreement gives us much more visibility towards significant positive cash flow beginning in 2008.

Our revenue growth combined with the refocus of programming dollars formerly committed to the NICC programming agreement and a continued emphasis on operational efficiency and cost management are expected to result in significant increases in cash flow in 2008.

Our performance expectations carry a number of risks including lower than expected subscriber growth, potential channel reposition and potentially lower than expected ratings or advertising rates. We expect advertising revenue to increase over 15% in 2008 from 2007 and total revenue to increase over 25% in 2008 over 2007.

Our increase in total revenue includes substantial increases in reported subscriber revenue resulting from both contractual rate increases from our recently renewed distribution agreements and from reductions in subscriber acquisition fees vetted from the gross subscriber revenue.

While subscriber revenue growth will be substantial in 2008, subscriber revenue growth will be more modest beyond 2008. While we expect increases in programming expenses in 2008 and beyond consistent with prior years, those increases will be largely offset in 2008 by the elimination of NICC programming expenses again resulting from the termination of those programming expenses in 2008.

We expect these factors and the continued focus on cost management efforts will result in a 2008 EBITDA in excess of $50 million and cash flow from operations in excess of $44 million.

Continued growth could drive 2009 EBITDA and cash flow from operations to exceed $85 million and $55 million respectively.

Clearly the rating success of the Hallmark Channel combined with certainty and meaningful cash flow resulting from our renewed distribution agreements brings continued opportunity for growth in Crown Media’s revenue and bottom line.

The addition of the Hallmark Movie Channel and Hallmark Movie Channel HD provide increased opportunities for growth and a very bright financial future for Crown Media.

With that I’ll turn it back to you.

Henry Schleiff

Thank you, Brian. In summary let’s take a quick look at what I consider to be the three key areas of our business going forward; programming, distribution and advertising.

Clearly our programming offers an exciting line up of original movies combined with classic series favorites which appeal on a very fundamental level to our ever growing audience. The momentum in our ratings success built throughout the year culminating in December, which was our best on record. A year with our highest month, week and day in our network history and delivering our best year ever. The tremendous growth Hallmark Channel has experienced in terms of ratings demonstrates that viewers recognize that Hallmark Channel is one of the very few destinations where they are guaranteed a valuable, family friendly experience. We have developed a brand based upon original and theme programming complemented by classic series and feature films with a focus on the holidays with Hallmark Channel as the number one destination for these special events.

We have an [inaudible] slated programming schedule for the remainder of 2008 with some 30 original movies, more than two a month, planned to continue to meet viewer demand for positive stories with wholesome and uplifting conclusions. We have already added the very popular series Seventh Heaven to our schedule earlier this year and have secured the addition of the perennially popular program Cheers which will begin airing in October and the baby-boomer favorite I Love Lucy which will be added to our schedule in 2009.

Our combination of family friendly programming and a recognizable brand are important not only for our viewers but also for our advertisers and distribution partners.

We have obviously had a very successful year with respect to our distribution. We increased our distribution from 75 to over 84 million subscribers and are unequivocally considered to be a nationally distributed cable network. This has also reflected our perceived value to advertisers, as well as enhancing our value to others as we continue to expand on new cable systems.

In the past twelve months we have renewed our distribution agreements with Comcast, Time Warner, DirecTV, Echo Star and NCTC representing 71 million subscribers. Earlier than we anticipated and on favorable terms which support further growth in our sub-revenues.

In addition we have laid the groundwork to begin to expand the distribution of Hallmark Movie Channel which will launch in High Def in just a few weeks. Needless to say I am especially pleased with the significant progress we have made in this area.

With the success this year in ratings growth and distribution expansion it is no surprise that we delivered another year of double-digit growth in advertising revenues. Our extremely positive brand image, combined with our distinct ability to attract a baby-boomer generation audience with its enormous purchasing power and continued growth adds up to a unique appeal for advertisers. Both Hallmark Channel and Hallmark Movie Channel were successful in expanding their client base with new blue chip advertising clients from industries across the spectrum.

The increasing demand for Hallmark Channel is clear with CPM’s in the scatter market of 60% over the up front. As we begin to plan for the new up front season I am confident we will be able to deliver another year of double-digit growth for Hallmark Channel and continue to expand upon the strong foundation of clients that we have established for Hallmark Movie Channel.

As we begin to look ahead to the remainder of 2008 and beyond, we will of course continue to be focused on pursuing our goals in a fiscally responsible way. One which enables us to maximize our revenues while reduce our debt while keeping a close eye on the requisite cost structure of our business.

As Brian mentioned, we expect to begin to generate substantial EBITDA and operating cash flow beginning this year and increasing in 2009. Our business model is a very attractive one with a relatively fixed cost structure.

I believe that we are finally approaching a more mature phase in this model with the majority of the increases in our advertising revenues and subscriber fees now falling to the bottom line.

At this point I will turn these proceedings over to the operator to assist us with the question-and-answer portion of our call.

Question-And-Answer Session


Thank you. Ladies and gentlemen if you have any questions or comments please key *1 on your touchtone phone. *1. If your question has been answered or you wish to withdraw your question please key *2. Questions will be taken in the order received.

Thank you.

The first question from the line of Alan Gould of Natexis Bleichroeder. Please go ahead.

Alan Gould - Natexis Bleichroeder

Thank you. First I’ve got a couple of questions for Brian. Brian I just want to make sure I recall these numbers correctly on the guidance. 2008, $58 million cash from operations, $40 million…what were the next two numbers for the 2009 numbers?

Brian Stewart

For 2009 it was $85 million in EBITDA and about $55 million in cash flow.

Alan Gould - Natexis Bleichroeder

Okay and those numbers only include the cash interest, am I correct in that? Not all the interest expense?

Brian Stewart

That’s correct.

Alan Gould - Natexis Bleichroeder

Okay. And could you help me out a little bit with the programming costs? Do you look at….should programming costs given the fact you are investing in more originals and you don’t have the NICC…should programming costs be about the same as it was last year?

Brian Stewart

There will be nominal increases in programming costs, Alan, that’s right. Because again we’ll invest in originals and acquire programming similar to how we have in the past but with the elimination of the NICC expense we will be relatively flat year-to-year.

Alan Gould - Natexis Bleichroeder

Okay and how does that hit the cash flow? You’ve got the programming amortization and your last year addition to programming license fees. In the couple of years that has added $45-$55 million to your cash flow from operations. Will that be as accretive this year?

Brian Stewart


Alan Gould - Natexis Bleichroeder

Okay. One question for you, Henry. One of the big issues when this company was trying to sell itself a couple of years ago was that you did not have these distribution deals in place. Your contract does incent you to sell the company. Now that all these distribution deals are in place on the core channel, should we start thinking about the possibility of selling the company again or is your focus this year to let’s create a Hallmark Movie Channel or promote the Hallmark Movie Channel?

Henry Schleiff

No. The focus is on running our business in the best interest of the shareholders and the business. It is not on whether we are for sale or not for sale. We are not for sale. Let me emphasize that. I think we’ve had an extremely successful year securing our base if you will to which you allude. I think we are obviously the singularly only large standing independent network out there. That’s not to say that we are not obviously attractive from a number of perspectives in the eyes of others. But what we did last year is what we are going to do this year. That is to really focus on growing the Hallmark Channel business especially the ad revenue line, and at the same time beginning to truly roll out Hallmark Movie Channel both in standard and as bandwidth comes available in High Definition. We think we have a real sleeping giant in Hallmark Movie Channel and I think the time is really now so unbelievably appropriate, propitious, you can pick the word – for a network that appeals to the baby-boomer generation which we know is growing by leaps and bounds in size and more importantly buying power with greater recognition in this ad market. So it is really a business, I think, that we are focusing on and running the business even better.

Alan Gould - Natexis Bleichroeder

Thank you very much.


The next question comes from the line of [Saul Wheel – SM Investments]. Please go ahead.

[Saul Wheel – SM Investments]

Thank you. Just on the 2008 EBITDA numbers. I’m just wondering…when I add the numbers up I don’t really get there. So I’m kind of curious. Maybe it has to do with how much you are reinvesting in programming this year but if your sub fees are up $27 million this year and your numbers…advertising up $31 that is +$58, and then you have your savings from the NICC deal which I thought were $25 million. Plus you’ve got I guess you increased revenue from recapturing part of the time based program and therefore another $8 or so. I’m not sure how you get…last year’s EBITDA attesting to the $7.4 NICC settlement I guess was minus $3.9. You had said you were going to try to get close to breakeven last year. I don’t see how you go from $3.9 to $50 when you have $58 plus another $25 plus another $8 unless you are investing another $30 million in programming this year. Is that correct?

Brian Stewart

Well, Sal, certainly on the programming fees that $25 million NICC component is not necessarily added into the other pieces because as I mentioned to Alan and as we have talked you are right. There is some substantial additional investment that we will continue to make in programming so that gets our year-to-year programming expense relatively flat with some nominal growth. Again, Henry had mentioned a lot of the investment in original programming and the success that those programs have had from a ratings standpoint. We talked about some of the additions of third-party series which we think will continue to drive our ratings, allow us to remain in the top ten, allow us to drive our demographics so that we can continue to push that 15+% advertising revenue. So we do believe there is additional investment that we need to continue to make in programming and that is why you see that programming line, and again withstanding the fact that the NICC programming goes away, that line year-to-year say is relatively flat with some nominal increases.

So to your other point, that NICC block of time while we believe very valuable it may not result in quite as high a number of incremental revenues as you had indicated. But certainly this years flat relatively breakeven EBITDA and add in those other revenue components that you mentioned – 25’ish on the subscription side and the 30’ish on the ad sales side. That is where you get +50 year-to-year.

[Saul Wheel – SM Investments]

So basically all the NICC savings is being reinvested in other forms of programming.

Brian Stewart

That’s right. And listen. We are getting guidance. We have a lot of confidence in the business and our core business and we see a lot of growth potential in the movie channel so we’re trying to be cautious with our guidance and we feel there may be some up side to those numbers.

[Saul Wheel – SM Investments]

Can you give any more detail on what kind of programming…I know you have more movies this year than last year…can you just break some of those things out? So many more movies. So much cost per movie. I guess you mentioned other licenses you secured. Or is that too much detail?

Brian Stewart

We can do that. Some of that now. Certainly in terms of the volume of inventory. I wouldn’t say that it necessarily is an increase in our overall pool of inventory. As we pick through some of the series that we have acquired as Henry mentioned some of those are household names, are very successful series both in their broadcast runs but have also been proven cable programs. Those come at some incremental investment. Then there is the continued focus on originals. We will air more originals in 2008 than we did in 2007.There is no question that there is an expected increase in our program investment. Also we will need to make additional investments in the movie channel and programming specifically for the movie channel as it grows in distribution and advertising revenue.

In terms of specifics, we can speak to closer to 30 original movies in 2008 than 20 in 2007 in terms of airing. I don’t know if that helps and gives some color to some of the programming expense.

[Saul Wheel – SM Investments]

Alright. Thank you.


Ladies and gentlemen for any additional questions please key *1 on your touchtone phone. Thank you.

The next question is from the line of Marguerite Wagner from Mutual of America.

Please go ahead.

Marguerite Wagner – Mutual of America

Could you give us any details on the revolver in terms of the interest rate on it that you got?

Brian Stewart

Yes. The credit facility is at similar interest terms than what we’ve had in the past which is about Libor +300. There are some additional payments that we make relative to the Hallmark support behind the credit facility. So we feel very comfortable about where we ended up on the revolver particularly given the current state of the credit market.

Marguerite Wagner – Mutual of America

And on the Hallmark debt has there been any intricate changes on the interest rate there?

Brian Stewart

Yes. The interest on the Hallmark debt is at Libor +500, all the Hallmark debt.

Marguerite Wagner – Mutual of America

And it had been?

Brian Stewart

Libor +300. Again, given market conditions we think that is a more than reasonable rate particularly given the pick nature of it through 2008 with cash beginning to be paid in 2009 so we view those to be very favorable rates.

Marguerite Wagner – Mutual of America

And I guess you are not going to give us any details in terms of what the new rates are in terms of distribution?

Brian Stewart

That’s correct.

Marguerite Wagner – Mutual of America

And no details on the new rates for the movie channel? The digital movie channel?

Henry Schleiff

Both are subject to the standard confidentiality agreements that exist throughout the industry.

Marguerite Wagner – Mutual of America

Okay. I wasn’t clear…is the movie channel, the standard movie channel, already rolled out?

Henry Schleiff

The Hallmark Movie Channel in standard def has really just finished its first phase. It now exists, as I think I indicated, in approximately a little bit more than 8 million homes. We are really going to focus on that now this year and at the same time I think it is April 2 is the formal launch date for Hallmark Movie Channel.

Marguerite Wagner – Mutual of America


Henry Schleiff

Both in digital. Right. And the latter will be in High Def with virtually simultaneous play of both.

Marguerite Wagner – Mutual of America

Okay. And in your revenue projections you did take into consideration the new distribution agreements?

Brian Stewart


Marguerite Wagner – Mutual of America

Okay. That’s all I have.


Thank you. That was the last question. For closing remarks I’ll hand the call back to Mr. Henry Schleiff. Please go ahead.

Henry Schleiff

Thank you very much. We are delighted with our performance in the fourth quarter indeed for 2007. We are looking forward as well for 2008 and we are certainly off to an auspicious start for the first 2-1/2 months, almost March. So thank you and we look forward to our next call.


Thank you, sir. Thank you, ladies and gentlemen for your participation in today’s conference. This concludes the call. You may now disconnect.

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 All other use is prohibited.


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