Gemstar-TV Guide International (GMST) has regained its footing as it moves beyond TV Guide Magazine and into interactive program guides and network media. We expect the strong growth of licensing and advertising revenue over the next two years to drive Gemstar shares toward $10. We recommend Gemstar at current prices for aggressive growth investors.
Gemstar-TV Guide enters 2007 in “execution mode” as recently quoted by management. The company has successfully grown beyond its shrinking TV Guide franchise and is building an integrated platform of services that guide consumers through the maze of today’s media choices.
The company’s recent launch of My TV Guide is the result of a successful convergence of Gemstar assets whereby users can organize favorite programs, receive “smart” program recommendations and remotely record programs via the Internet.
Key to the company’s success is the leveraging of its TV Guide Channel into what is now known as the TV Guide Network. The Network now reaches more than 80 million households and includes a growing stable of original content such as the pre-show to American Idol called ‘Idol Tonight,’ the ‘Red Carpet’ award pre-shows and a new reality series to premier this month called ‘America’s Next Producer.’ In addition, Gemstar produces the TVG horseracing network reaching 26 million households.
Gemstar’s growth is currently being driven by its aggressive licensing of digital programming content. Agreements with Yahoo (YHOO), Sky Broadcasting (BSY) and most recently with Verizon (NYSE:VZ) all involve the successful licensing of the company’s interactive programming guides.
The company’s flagship TV Guide Magazine, at 22% of Q1 revenue, remains a drag on earnings although the company has significantly reduced expenses and slowed revenue erosion over the past year. Ad revenue grew 18% in Q1 and the publication will serve as the cornerstone of a new cross-platform “breaking news” initiative leveraging its sizable news gathering assets across all platforms.
After several years of retrenchment we believe Gemstar-TV Guide is set to reward investors with profitable growth. In Q1, the company posted its second consecutive quarter of revenue gains, fifth consecutive quarter of EBITDA growth and posted EPS of $0.07, up 250% from $0.02 last year. A wildcard remains News Corp.'s Rupert Murdoch’s 41% stake in the company and we believe Gemstar’s valuable intellectual property could be a major asset to potential cable or telecom acquirers.
Based on the success of Gemstar’s turnaround to-date and expected growth from the host of new product offerings in 2007, we believe Gemstar shares are highly attractive at current prices. We recommend these shares for aggressive growth investors.
First Quarter Results
First quarter revenue grew 9% to $156.7 million on strong patent licensing growth. The company generated adjusted EBITDA of $51 million in the quarter, up from $16 million last year, though favorably impacted by approximately $17 million in one-time items.
Per the company’s three segments, Gemstar’s Guidance Technology and Solutions [GTS] division, that includes the licensing of its interactive program guides, posted a 26% jump in Q1 revenue to $75.5 million. The company’s Media Networks segment, including the TV Guide Network, fell 2% to $47.6 million and TV Guide Publishing fell 5% to $33.7 million.
Guidance and Expectations
In GTS, the company expects to see further growth from deals signed in 2006 with Sky Broadcasting and Yahoo, as well as other licensees. The segment will also benefit in Q2 from the March acquisition of Aptiv Digital, a developer of software solutions for TV set-top boxes. Overall, we expect GTS to remain the company’s main growth vehicle for both revenue and EBITDA.
In Media Networks, we expect handle volume from TVG Network wagering to grow in the low double digits in 2007. TV Guide Channel continues to be impacted by slow ad growth. Overall, we expect revenue of Media Networks to grow 3% in 2007.
In publishing, the company expects a 2007 EDITDA loss of $30—35 million due to slower ad growth and higher expenses to be incurred later in the year due to planned marketing and subscriber acquisition costs. We expect further revenue erosion in the segment.
Overall, we expect 2007 revenue growth for Gemstar of 9% to $622 million and EPS of $0.20.
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