Hollywood Media Q4 2007 Earnings Call Transcript

Mar.17.08 | About: Hollywood Media (HOLL)

Hollywood Media Corporation (NASDAQ:HOLL)

Q4 2007 Earnings Call

March 17, 2008 2:00 pm ET

Executives

Mitchell Rubenstein - Chairman of the Board, Chief Executive Officer

Brian Walsh - Associated General Counsel

Analysts

Murray Arenson - Ferris, Baker Watts

Rich Ingrassia - Roth Capital Partners

Operator

Good morning. My name is Ray and I will be your conference operator today. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. Rubenstein. Sir, you may begin your conference.

Mitchell Rubenstein

Okay, thanks, Ray. I would like to welcome everyone to today’s conference call to discuss Hollywood Media's fourth quarter and full year 2007 financial results. Today’s press release announcing these results is available for viewing on the investor relations section of Hollywood Media's website at Hollywood.com. After my prepared remarks, we will host a Q&A period. As a reminder, this teleconference is being recorded and available for replay as described in today’s press release.

At this time, I would like to turn the call over to Brian Walsh, Associate General Counsel of Hollywood Media, to read a cautionary statement about forward-looking information. Brian.

Brian Walsh

Good morning, everyone. This presentation may contain, in addition to historical information, forward-looking statements reflecting expectations that are subject to risks and uncertainties that may cause actual outcomes to differ materially from such expectations. Many potential risks and uncertainties are discussed in Hollywood Media's Form 10-K report for 2006 and subsequent reports filed with the SEC and will also be discussed in Hollywood Media's Form 10-K for 2007 to be filed later today. These reports can be accessed through the investor relations section of the Hollywood.com website or from the SEC’s Edgar database at sec.gov.

Because forward-looking statements are subject to risks and uncertainties, we caution you not to place undue reliance on any forward-looking statements. Forward-looking statements during this presentation speak only as of the date of this presentation. All written or oral forward-looking statements by Hollywood Media or on its behalf are qualified by these cautionary statements.

Now I’ll turn the call back over to Mitch.

Mitchell Rubenstein

Okay, thanks, Brian. Before we begin, let me remind you that in August 2007, Hollywood Media sold its Showtimes business unit to West World Media. And in August 2006, Hollywood Media sold its Baseline StudioSystems business unit to the New York Times. For purposes of the financial results presented in today’s press release, in accordance with GAAP the operating results of these sold businesses and the gain on sale of these businesses are reported as discontinued operations and excluded from Hollywood Media's net revenues and results of continuing operations for all periods presented.

Now turning to our results; our full year 2007 net revenues increased 13.2% as compared to 2006 to $123.9 million. During the fourth quarter 2007, our total net revenues decreased 8.8% to $31 million. This decrease was a result of the 19-day Broadway stagehand strike in November of 2007.

Hollywood Media's net loss for the fourth quarter of 2007 was $1.9 million, or $0.07 per share based on 32.9 million weighted average shares outstanding, compared to a net loss for the fourth quarter of 2006 of $1.7 million or $0.06 per share based on 33.1 million weighted average shares outstanding. The decrease in weighted average shares outstanding in the fourth quarter of 2007 as compared to the same period of 2006 was due to the company’s stock repurchases during the fourth quarter of 2007.

Net income for the full 2007 year was $1.7 million, or $0.05 per share based on 33.3 million weighted average shares outstanding, compared to net income of $9.5 million for full year 2006, or $0.29 per share based on 32.8 million weighted average shares outstanding.

During the fourth quarter of 2007, the company used approximately $5.1 million to purchase approximately 2 million shares of its common stock under its stock repurchase program announced on October 1, 2007. As of December 31, 2007, there were 31,897,983 shares of common stock outstanding. These repurchases were pursuant to our previously announced stock repurchase program, which authorizes up to $10 million of our cash to repurchase shares of our outstanding common stock from time to time, subject to financial and market conditions, legal requirements, and other factors.

The fourth quarter 2007 loss from continuing operations was $2.4 million and EBITDA from continuing operations for the company as a whole was a loss of $1.8 million for the fourth quarter of 2007. In addition to the stagehand strike, our results of continuing operations for the fourth quarter and full year 2007 were negatively impacted by redundant lease expenses associated with the consolidation of Broadway ticketing division’s New York offices and increased investment in Hollywood.com.

Today’s press release, which is posted on our website, Hollywood.com, includes additional information about the EBITDA results for Hollywood Media and its segments. Now I’ll turn to Hollywood Media's division results.

Our Broadway ticketing division continues to be the largest contributor to revenues, accounting for 90% of Hollywood Media's total revenue in the fourth quarter despite the negative impact of the stagehand strike in November. The strike ended on November 28, 2007 and caused 19 days of cancelled Broadway performances during a period that included the long Thanksgiving weekend.

The fourth quarter is historically the strongest quarter for Broadway ticket sales. The effects of the strike on our Broadway ticketing segment results included the segment’s refunds to customers for tickets previously sold for the cancelled performances, as well as temporary increased staffing costs to handle the refunds. Some customers elected to exchange their tickets for other performances after the strike period. Our Broadway ticketing business received refunds or credits from the theater box offices on virtually all tickets that our Broadway ticketing business had purchased for the cancelled performances and these refunds or credits to us do not include our service fees. Therefore, the impact of the strike was a reduction in revenue and the loss of the service fees from gross margin.

Despite the impact of the strike for the fourth quarter of 2007, we reported $1.1 million of EBITDA for the Broadway ticketing division and the division’s net income was $1 million for the period.

Our Broadway ticketing sales continue to benefit from increased pricing flexibility following the law change in New York in June 2007 that eliminated price caps on service fees on event tickets. We continue adjusting and evaluating our pricing models on our consumer sales with the goal of expanding margins on tickets. As a result, our margin percentage on consumer ticket sales increased in the fourth quarter of 2007 as compared to the fourth quarter of 2006.

The overall Broadway ticketing division gross margin percentage on ticket sales is influenced by the mix of consumer ticket sales and group sales because group sales typically generate lower margin than consumer sales and the consumer-to-group ratio varies from period to period.

Turning now to our ad sales business, during the fourth quarter of 2007, our ad sales revenues rose to $2.9 million, an increase of 25.3% compared to the same period of 2006. We have been and continue investing in and building improvements for our Hollywood.com business, including a redesign of our Hollywood.com website expected to launch later in 2008.

We are making progress on sales initiatives under the leadership of the new President of Hollywood.com and the organization he is building. While these initiatives will take some time to flow to the bottom line, we believe this is the right long-term strategy for the company. I’ll describe some of the Hollywood.com developments.

In Q4, we kicked off the rebuilding and rebranding efforts for the Hollywood.com website and a new mobile offering. In Q4, we restructured our advertising operations team to more effectively tailor our marketing programs to different types of advertisers. For example, we have endemic advertisers, such as the movie studios, TV networks, and home entertainment, and we have non-endemic accounts for whom we provide an attractive way to be associated with Hollywood entertainment.

On the sales front, we’ve increased our client list. In Q4, we also introduced new custom high impact ad units that provide greater impact to our users and which garner a premium rate from our advertisers. To improve our content appeal, we recently added to the team by hiring a new editor in chief who previously worked at E! Online and Variety to retool our content offerings. We have focused on growing the experience and seniority of our sales team by adding a new VP of endemic business development who previously worked at CNET and Netflix.

Our focus in 2008 is not only to grow the top line but retool the product so as to better meet the evolving demands of today’s online entertainment consumer. As such, our investment in 2008 and the anticipated marketing spend is focused on growing both the size and quality of our audience. 2008 therefore is a reinvestment year for Hollywood.com.

Turning to MovieTickets.com, in which we own a 26.2% equity interest, the unit continued to grow in 2007 with significant revenue and income increases driven by strong ad sales performance. MovieTickets.com now tickets exclusively for 116 movie theater chains.

Please note that MovieTickets.com is not consolidated with Hollywood Media's financial statements and MovieTickets.com’s earnings are not included in Hollywood Media's financial results.

In closing, our 2007 revenue growth was driven by growth in our Broadway ticketing and ad sales divisions. We have a well-established ticketing business with very strong brand recognition and we continue to work on improving margins and driving greater cash flows from our business in the year ahead. We are also continuing to invest in our online platform at Hollywood.com with the goal of strengthening the site’s appeal for users and advertisers.

We maintained a strong balance sheet and closed the quarter with approximately $26.8 million in cash and cash equivalents. As we seek to maximize our operating results, we will continue to review opportunities to return value to our shareholders.

With that, I would like to open the call for questions. Ray.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Murray Arenson of Ferris Baker Watts.

Murray Arenson - Ferris, Baker Watts

Thanks. Good morning, Mitch. A couple of questions for you; one is, did you have full benefit would you say of the pricing leverage in the fourth quarter?

Mitchell Rubenstein

You’re talking about in our Broadway.com business?

Murray Arenson - Ferris, Baker Watts

Yes.

Mitchell Rubenstein

Well, we continued to test different pricing strategies during the fourth quarter and of course, our testing was interrupted by the Broadway stagehand strike, so we averaged about 24% service fee during the fourth quarter. But I would say that the test was interrupted by the Broadway stagehand strike, so we are continuing to test and continuing to charge service fees in approximately the 24% to 25% range.

Murray Arenson - Ferris, Baker Watts

And so as you look out at 2008, and obviously you are well through first quarter here, how do you handicap the growth prospects looking at the two components of pricing versus just overall unit sales?

Mitchell Rubenstein

Well obviously the first quarter, as you know, is generally the weakest quarter for Broadway ticket sales seasonally, so it’s hard to extrapolate completely off of the second quarter but we are maintaining without difficulty 24% to 25% service fees.

We cannot project what full year unit sales will be, just because it’s too early in the year to do so and we’ll have more visibility as we get into the second quarter and into the summer.

Murray Arenson - Ferris, Baker Watts

And looking at both the business, both the major business units, how do you view things with respect to any economic exposure?

Mitchell Rubenstein

Well, the weakness in the dollar benefits Broadway, given the number of foreign visitors, tourists in particular that come to New York, more and more so given the continued weakness in the dollar.

A lot of it will depend strictly on travel into New York City. Some people drive into New York and others fly into New York, so we’re not seeing any impact at the moment in terms of the economic conditions on the Broadway industry as a whole. But I can’t predict what will happen as the year unfolds.

In terms of the ad sales business, given the past weakness in that particular division, I don’t think that the overall weakness in the economy will have much impact on our ad sales business, given the room to grow that exists there so I see no impact from that on our ad sales business unit.

Murray Arenson - Ferris, Baker Watts

And since you characterized this as a reinvestment year on the ad sale side of the business in particular, what does that mean in terms of your ability to start making money as a whole and how you view your path to get there?

Mitchell Rubenstein

Well, we’ve made, as I mentioned in my prepared remarks, significant improvements in terms of the organizational structure, the personnel, the quality of the ad sales team and so on at Hollywood.com and in our ad sales group generally. And we’ve all been working hard on a new Hollywood.com website that will launch most likely in Q3 of this year.

We expect that that launch, assuming it’s successful, which we expect that it will be, will turn the site in terms of its economics into profitability either in Q4 or some time in 2009. We won’t know until the site relaunches and we see the traction that it’s getting.

We have previewed the new site designs with key members of the advertising community, in particular at the movie studios and they are delighted with the new redesign. Most importantly will be the consumer reaction and we have been doing focus groups and those also have been very favorable. But the rubber meets the road when the actual redesign occurs.

Murray Arenson - Ferris, Baker Watts

And so you see that as a probable turning point to go EBITDA positive and then from there, it’s a matter of offsetting all the additional corporate expenses and stuff?

Mitchell Rubenstein

Right, right. It won’t happen immediately. The site redesign will take a month or two with some marketing behind it to gain traction, possibly a little longer and then the sales will come off of that. But we should know shortly after the redesign what the outlook will be and we expect it will be favorable. There’s just a lot of social networking aspects that we’re adding, a lot of additional content, much more interactivity and we just believe we’ll increase page views per unique user and that we’ll increase overall unique users as well. If we’re right, that will create momentum and increase revenues and so on.

Murray Arenson - Ferris, Baker Watts

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Rich Ingrassia of Roth Capital Partners. Please go ahead.

Rich Ingrassia - Roth Capital Partners

Thanks. Good morning, Mitch. I’m going to ask you just to maybe expand a little bit on what you said about the Broadway -- Broadway as an industry in ’08 and maybe draw on some historical comparisons to prior recessions. Obviously we have a much weaker dollar now than back in ’02 but would you expect big ticket entertainment to suffer in ’08, given what you are seeing now and the fact that the pent-up demand that was created by the strike looks like it’s more or less flowed through the system now?

Mitchell Rubenstein

Well, historically there really hasn’t been a period of time when there’s been online Broadway ticketing during a period of recession. In terms of the industry as a whole and its impact, there has been an adverse impact on Broadway during recessionary type periods but less so than the economy as a whole.

And if you look at entertainment in general, the movie industry in particular has done well. Even during the Great Depression, people were still going to the movies because it was a relatively inexpensive form of entertainment. Now one might think well, Broadway’s an expensive form of entertainment but it’s really not. If people are going to vacation in New York or live in the suburbs or whatever and coming into the city, incrementally it’s just not that expensive.

So our view is that depending upon the severity of the recession, and again offset by the weakness of the dollar bringing foreign tourists into New York in the levels that they are, that we don’t expect any material adverse effect by virtue of the recession on the Broadway ticketing business.

Rich Ingrassia - Roth Capital Partners

Okay, just two more questions, if you don’t mind; the Visa sponsorship on Broadway.com strikes me as a high margin opportunity. Was there any impact in the Internet ad segment in the quarter from that? And do you have a sense for what percent of ad revenues in ’08 you might get from a source of that kind?

Mitchell Rubenstein

Well, during 2007 we made a shift where we had our ad sales group discontinue selling the advertising for the Broadway.com website and had it done internal by the Broadway.com management team itself, so any revenue numbers from ad sales or sponsorships on Broadway.com will now be in the Broadway.com segment numbers going forward and not in the ad sales numbers.

The main reason that we did that switch was not from -- so much from an accounting standpoint but from the way that we’re handling the ad sales and sponsorships sales on Broadway going forward, so that in 2007 we stopped doing what I would call the, you know, more routine kind of web advertising on Broadway.com and went to what we would call endemic advertising, which are sponsors that are more relational to the Broadway industry.

So we have three major sponsors now sponsoring various areas on Broadway.com, including Visa, as you mentioned, Hilton Hotels and Jet Blue. And we are expecting to add more of those type of sponsors unique to their different categories, so we may have a luxury automobile company, for example, as a sponsor and so on.

There’s no cost of goods sold associated with this, since we’re not using ad sales people. We’re using the management team so the dollars we’re receiving for the most part are 100% gross margin dollars, which is very good.

We also implemented in 2000 a similar parallel path to get the shows to start advertising on Broadway.com, which by the way is benefited by any adverse market conditions because they need to market more to get people to come to the shows. And there we are targeting as our competitor The New York Times print theater section, which has significant revenues. As everyone knows, print is on a downward trend and online, advertising online is on an upward trend, so we’re -- we have a very good opportunity there and several shows have already started to advertise with us. And similarly, there’s minimal expense associated with that, so that drops to gross margin.

So looking forward on our Broadway business is to build off of kind of the ticketing platform a very robust advertising sponsorship platform focused on endemic advertisers. So we think there’s a lot of upside to that and those are high margin dollars, which would be nice to get into the mix, and which we are seeing coming into the mix. So we are highly optimistic this will be really a banner year for Broadway.com ad sales and sponsorship sales, based on what we’ve seen so far in ’07.

Rich Ingrassia - Roth Capital Partners

Okay, and then the last question, just looking at first brush here, maybe you spent something under $2 million on stock buy-backs in the quarter off the $10 million that’s authorized?

Mitchell Rubenstein

Yeah, we spent -- let me correct that number for you; on the buy-back, we spent $5.1 million and bought back approximately 2 million shares of stock, so we have $4.9 million authorized for the purchase of shares under the program.

Rich Ingrassia - Roth Capital Partners

Okay. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back to Mr. Rubenstein for any closing comments.

Mitchell Rubenstein

Okay. I’d like to thank everyone for participating and look forward to updating you on our next call for the Q108 earnings call. Thank you very much.

Operator

Thank you. This concludes today’s Hollywood Media Corp. fourth quarter and full year 2007 earnings call. You may now disconnect and have a great day.

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