Gemstar-TV Guide (GMST)
Q4 2005 Earnings Conference Call
March 8, 2006, 5:00 p.m. EST

Executives:

Rich Batista, Chief Executive Officer
Robert L. Carl, Vice-President, Investor Relations
Peter C. Halt, Chief Accounting Officer

Analysts:

Rob Sanderson, American Technology Research
April Horace, Hoefer & Arnett
Barton Crockett, JP Morgan
Todd Mitchell, Kaufman Brothers, L.P.
Alan Gould, CFA, Natexis Bleichroeder, Inc.
Mike Drakin, Upshaw Capital

Presentation

Operator

Good day ladies and gentlemen, thank you for standing by and welcome to the Gemstar-TV Guide International 4th Quarter 2005 Earnings Conference Call. My name is Carlo and I’ll be your coordinator for today’s presentation. At this time, all of our participants are in listen-only mode. We will be facilitating a question and answer session toward the end of today’s prepared remarks, at which time if you’d like to ask a question, please key “*1” on your touchtone telephone. If at any time during the call, you require audio assistance, feel free to press “*0” and a conference coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I’d now like to turn the presentation over to your host for today’s conference, Robert L. Carl, Vice-President of Investor Relations. Please proceed sir.

Robert L. Carl, Vice-President, Investor Relations

Thank you very much Carlo and good afternoon everyone. I’d like to welcome you to Gemstar-TV Guide’s 4th Quarter and Full Year 2005 Conference Call. I’m joined this afternoon by Rich Batista, Gemstar-TV Guide’s Executive Officer and acting Chief Financial Office, as well as Peter Halt, our Chief Accounting Officer. We issued a press release earlier this afternoon which detailed Gemstar-TV Guide’s financial performance for the 4th Quarter and full year ended December 31, 2005. This release along with our Form 10-K contains more information regarding the company and its various segments.

Before Rich provides his remarks, I’d like to remind you that the matters discussed on today’s conference call may contain forward-looking statements that involve risks and uncertainties, including risks and uncertainties related to the transformation of our TV Guide Magazine publishing business, timely availability and market acceptance of products and services incorporating the company’s technologies and content, our investment in new and existing business including TV Guide Magazine and TV Guide Spot and TV Guide Mobile, the impact of competitive products, services, and pricing, ongoing and future potential litigation, and the other risks detailed from time to time in the company’s SEC reports, including the most recent reports on Forms 10-K, 10-Q, and 8-K, each of them maybe amended from time to time. The company assumes no obligation to update these forward-looking statements. As always, at the conclusion of today’s remarks, we’ll take your questions. And now let me turn it over to Rich.

Rich Batista, Chief Executive Officer

Thanks Rob and on behalf of the management team at Gemstar-TV Guide thank you all for taking the time to participate in our year end conference call. Last year, during the 1st Quarter call, as the company’s newly appointed CEO, I said that 2005 would be a year in which we would focus on rebuilding our operations, making strategic investments, and executing with precision. I believe we have made significant progress in all of these areas. During the first part of the call, I’d like to discuss the progress we made at the company in 2005. Later, I will update you on where we are in the implementation of our new strategic vision.

So, let’s start with the magazine. As you know, in October of last year, we transformed TV Guide Magazine into a full-sized publication that is more relevant and useful to today’s television viewers and to the advertisers who are trying to reach them. The new TV Guide is richer in content, more robust in photography and design, and more topical and newsworthy with a keener focus on television entertainment and guidance for today’s multitasking consumers. This dramatic positioning is unprecedented in the publishing landscape. We are encouraged by the initial reception by consumers. The first 11 issues of the new magazine, which debuted with the Ty Pennington Extreme Makeover Cover and also featured a very popular NBC Medium 3D Glasses promotional issue, averaged newsstand sales of 420,000 copies per week, up 45% over the average newsstand sales for the digest in the 3rd Quarter of 2005. The average newsstand sales for these 11 issues showed a 20% increase of the average newsstand sales for the same 11 issues the prior year. The 4th Quarter newsstands sales were up over the prior year’s 4th Quarter; the first time this had happened in over two decades. Moreover, cancellations related to the transformation were 80% less than what we modeled. We have also increased our advertising CPM by two to three times while decreasing our guaranteed rate base.

Our reformatting of TV Guide was essentially a launch of an entirely new magazine, thus presenting a new value proposition for advertisers. Similar to the pattern exhibited by many new magazine launches, our expectation is that advertising in the new TV Guide will grow over time. We believe that publication is well positioned to attract a more diverse base of advertisers than the digest product did previously. Since the re-launch, we’re pleased we’ve added several new advertisers including Ford Fusion, Oral-B, Splendor, and Sony Bravia, and others returned to the magazine after long absences including Audiovox, Sony Fixers, Oxygen Media, and Sketchers. In general, we’re encouraged by the results of our early consumer research done primarily through focus groups. This research has told us that the new magazine is appealing to a younger audience with a perceived age of a typical reader dropping to 30-45 years old from 60 prior to the re-launch. Readers are showing high levels of interest in the magazine, have embraced new editorial features such as the Hotlist and Behind the Scenes. Also encouraging, very young consumers saw themselves as the typical TV Guide reader by the time they reached age 35. The transformed TV Guide Magazine is a terrific first step in the reinvigoration of the overall TV Guide brand.

Moving to our TV Guide Channel business, 2005 was the year of solid progress. The TV Guide Channel continued its aggressive effort to ramp up original programming and increase its visibility within the marketplace. These investments paid off in both ratings and in revenues. Year over year, our national ratings were up 10% and the national rating for adults 18-49 in the 7-11 p.m. time period was up 20%. We believe that the increased ratings resulted from stronger programming and the red carpet pre-shows we introduced in 2005. As a result, advertising revenue for TV Guide Channel increased approximately 10% year over year. I think a good indicator of the success of our programming initiative this past year is to note that 8 of our top 10 programs in households came as a result of our programming spend for 2005. Our top 10 highest rated earnings for the year averaged a 0.46 household rating, up 31% from the average of the top 10 in 2004.

TVG Network, our other cable television, and DVS Channel had a strong year growing in households, wagering accounts, handle, and revenue. For 2005, TVG Network revenue increased by 32.2% to $51.5 million. This growth reflects increased wagering volumes for both our wagering operations and the wagering operations of our licensees. TVG Network subscribes at the end of the 2005 reached a record high of 18 million, up nearly 26% from the end of the 2004. We saw growth from every one of our major cable and satellite affiliates including 1.5 million net additional households from Comcast Systems.

Turning now to our IPG businesses: In October of last year, we united our consumer electronics and cable and satellite IPG businesses under the leadership of Mike McKee, formerly COO of the Consumer Electronics Group. We made this move because we believe there would be benefits for both divisions through new efficiencies and shared knowledge. In addition to his role as President of our IPG Businesses, Mike was also appointed COO of Gemstar-TV Guide to support me in managing the overall operations of the company.

2005 marked a period of continued penetration for Gemstar-TV Guide IPG Technologies and Services. The company signed new IPG agreements with cable distributors and CE device manufacturers. In the cable and satellite segment, a number of households that received one of our IPGs or an IPG license under one of our patterns grew to 39.4 million. Our consumer electronic segment showed noticeable improvements in both the US and abroad. At the beginning of last year, I mentioned that we needed to improve our reporting process and time to market in the US. I am pleased to report that in 2005 we met customer reporting deadlines at a rate significantly higher than we had in the previous year. In 2005, we doubled the level of incorporations worldwide as 198 CE products were released incorporating our IPG, up significantly from models released in 2004. At year end 2005, our CE IPG had been incorporated into 388 CE products worldwide. As I’ve mentioned on several occasions, we believe that Japan and European CE markets have strong growth prospects and that the US CE market presents promise for growth here, but will take more time to materialize.

Consistent with our corporate mandate to strengthen and better integrate all of our businesses, we announced this week a realignment of our Worldwide CE Group and the centralization of the sales and marketing effort. Through two internal promotions and the hiring of two CE industry veterans, we have solidified our leadership team and better positioned our company to capitalize on opportunities in the marketplace around the world.

Before I turn it back to Rob, who will discuss in greater detail our operational and financial performance in 2005, I want to take a moment to update you on our CFO search. As we announced in January, we are engaged in a full search for a new chief financial office, and please put the progress on the search thus far in hiring for this key position is a high priority for me at this time. With that said, I’ll turn it over to Rob and then I’ll rap up our prepared remarks with a discussion of strategy, implementation, and priorities for 2006.

Robert L. Carl, Vice-President, Investor Relations

Thanks Rich. In this section, I’ll first cover a few of the segment level financial highlights for 2005 and spend the majority of my time discussing some key metrics for a number of our businesses. I will conclude with a brief discussion of liquidity. Detailed financial analysis and financial tables are contained in our press release and in our Form 10-L filing, both of which are readily available on our website. Noting that the revenue figures that we recorded do not include the discontinued SkyMall business, the revenue from continuing operations for 2005 was $604.2 million compared with revenue of $676.4 million in 2004. The largest contributor was our cable and satellite segments. These revenues grew to $271.8 million, which was 45% of the company’s total. Our publishing segment, which has historically been our largest revenue source, saw revenues decline to $237.9 million or 39.4% of consolidated revenues. In our consumer electronics segment, revenue declined to $94.5 million or 15.6% of the total. In a few moments I will discuss the primary factors that drove these increases and decreases.

The operating loss for 2005 narrowed to $35.7 million versus an operating loss of $104.5 million for 2004. As we will discuss in a moment, a large portion of our overall operating loss in 2005 was driven by our publishing segment, where we had total operating losses of $93.4 million, primarily from the discontinued Inside TV Magazine and the startup and transition to our new and improved full-sized TV Guide Magazine. Also, please note that in comparing year to year, the operating loss in 2004 included $131.6 million write-off of the remaining goodwill and intangible assets for our magazine business. This was offset by $19.4 million in consumer electronics segment settlements and a $10.1 million favorable lease settlement associated with the discontinued eBooks business. We did not have comparable settlements or write-offs in 2005.

Net income for 2005 was $54.8 million or 13 cents per diluted share compared with a net loss of $94.5 million or 22 cents per diluted share in 2004. Our net income for the year was positively impacted by several factors. Among them, the $43.2 million pretax gain on the sale of SkyMall, the recognition of a $40.4 million income tax benefit from continuing operations, and a $15.5 million net interest income during the year. These gains were partially offset by operating expenses in both the publishing and cable and satellite segments.

I would now like to turn the discussion towards the financial performance of our four segments and some of the operational progress we made in a number of our business units during 2005.

Our publishing segment, which at year end excluded the discontinued SkyMall operations, generated revenue of $237.9 million in 2005. This represented a decrease of $90 million or 27.4%, which is primarily due to decreases of $40.8 million in advertising revenue and $47.3 million in circulation revenue at TV Guide Magazine. For 2005, adjusted EBITDA for the publishing segment was a negative $93.4 million, a decrease of $98.4 million from adjusted EBITDA of $5 million from the prior year. Although TV Guide Magazine expenses were reduced by $43.2 million, as a result a significantly lower production cost and operating cost, these cost savings were more than offset by the decline in revenue, operating losses associated with the launch of the new and improved TV Guide Magazine, and the operating losses for the now shuddered Inside TV publication.

As we look forward to 2006, I think it’s important for us to look at some of our key magazine metrics. As we reported in mid-January and as Rich has already mentioned, we are optimistic regarding the early progress of our new and improved magazine. Let’s first look at retail newsstand pockets. As a point of reference, in the 1st Quarter of 2005, we had 235,000 digest-sized pockets at retail, many with retailers who had carried out publication for over 50 years, and as you probably know, none of these digest pockets can hold a full-sized magazine. Working hard, our sales force and distribution partners secured 65,000 new pockets for the full-sized magazine at launch, and as of last week we had increased this to approximately 122,000 operational pockets. By the end of this year, we expect our pockets at retail to increase another 30-40%. We’re also pleased with the increase in fell-through retailers of same. As mentioned on our Q3 call, the average newsstand copies sales for that quarter had slipped to 290,000 copies per week. After the re-launch, the first 11 issues of the new magazine with a promotional cover price of 99 cents, averaged newsstand sales of approximately 420,000 per issue. Our sixth issue, featuring the special 3D glasses for an episode of NBC’s medium television series, and we achieved sales of approximately 875,000 for that at newsstand. The average newsstand sale for the first 11 issues represented a 45% gain over the average weekly digest newsstand sales number in the 3rd quarter of 2005. It also represented a 20% increase in average newsstand sales for the comparable 11-week period in 2004. In January 2006, we did increase our cover price to $1.99. We believe this 100% increase will improve our newsstand revenue but will also result in near-term decline of approximately 20-25% in average weekly newsstand unit sales as compared to the first 11 issues. With our planned pocket growth throughout the year and increased consumer awareness, we expect that our average single copy newsstand sales will grow over time.

Let’s look at the magazine’s total circulation. As we have previously mentioned, we are purposely reducing our TV Guide Magazine subscriber file to eliminate noncontributing subscribers. As previously announced, we reduced our circulation base down to a weekly average of 4.9 million copies during the 4th Quarter. We intend to continue to eliminate low and negative contribution subscribers. As planned, this number has been steadily declining and we expect to manage it down further to our target rate base of 3.2 million in total circulation by the end of the year.

Now, let’s look at ad pages: TV Guide Magazine has historically had its highest level of ad pages in the 4th Quarter; however last year, we experienced a significant decline from the prior year. This ad page decline was anticipated in connection with the transformation of TV Guide from a mass distributed, low CPM, digest-sized product to a targeted, full-sized, full color television entertainment and guidance magazine. As Rich mentioned, the first 11 issues of the reformatted TV Guide Magazine saw an appreciable increase in average CPM. However, this did not offset the anticipate impact of fewer ad pages. As a result, advertising revenues for these first 11 issues were approximately $10 million lower than the digest-sized magazine for the comparable period in the prior quarter. We share the comparison of ad pages for the reformatted magazine versus the old digest solely to aid and understanding of fluctuations in our revenues. However, we want to be clear that these are not comparable products to advertisers. When we reformatted TV Guide Magazine we essentially launched a new publication.

For the first half of 2006, we did not anticipate a meaningful increase in ad pages as we continue to establish ourselves with new advertisers and new advertising categories. We do anticipate increased advertising revenue in the latter part of the year in conjunction with the rollout of the new fall television lineups. Our ability to maintain a higher CPM while increasing ad pages is critical to the full-sized magazine success. I also want to note that in line with our strategy every new subscription and copy sold in newsstand since early January, when we discontinued our 99 cent promotional pricing, has had a positive contribution margin. This is a significant turn of events for us.

We made a significant investment last year in our new magazine strategy and as you know 2006 will also be a year of investment. We expect to combine 2005-2006 operating losses to be between $100 and $110 million in line with our original estimates. I would like to remind everyone that the actual amount and finding of losses in 2006 will depend on a number of actors including the rate of additional rack acquisitions and the level and timing of consumer and advertiser acceptance. We continue to expect the reformatted TV Guide Magazine to begin contributing positively to the publishing segment adjusted EBITDA in the latter half of 2008. In addition to our magazine, the publishing segment also contains a growing online business, and this is an area of strategic focus for us, so I’d like to take a few moments to share with you more details regarding our progress in 2005 and early 2006. We’re very encouraged by both the increased revenue and the exciting changes at tvguide.com, some of which you have read about in our recent press releases.

Revenue for the TV-Guide Online business, which is predominantly advertising driven, was up 25.8% in 2005. For the year we recorded $8 million in revenue, making a fourth consecutive year of increases. We also increased registered users by 2.2 million in 2005 and in the year with 8.7 million. But, we were down 9% in unique users year over year, averaging approximately 2.6 million uniques per month. However, we ended the year on an uptake as uniques increased by 17% from the 3rd Quarter. We expected the uniques will continue to increase as a result of several initiatives underway including expanding our content offering and more focused affiliate marketing plans. Last but by no means least, beginning in the 4th Quarter of 2005 and continuing on into 2006, we began optimizing our website for search engine results and we believe that this too will drive growth in unique users. While it is too early to draw definitive conclusions, these initiatives appear to be succeeding. The numbers for the October-January period indicate continuing increases in uniques, which reads 3.5 million in January, our highest traffic level in over a year.

Page views are also turning positively for us; tvguide.com website visitors had over 140 million page views in the 4th Quarter and the full year 2005 logged on to more than 497 million pages. According to Net Ratings, Inc., this page view level ranks a strong second in the TV Guide website category, outpacing number three by nearly 100 million page views. The number of page views per user in the 4th Quarter of 2005 was up 23% over the same period in the prior year and for all of 2005 we were also very strong averaging 16 pages per unique, ranking second only to Yahoo TV in the TV website category. We are pleased with out online unit trends setting into 2006.

To wrap up the publishing segment, I’ll just make a couple of comments regarding the sale of our SkyMall business, which is reported and discontinued operations at year end 2005. On the sale on December 1, 2005, we received cash proceeds of $43.3 million and we retained $12 million of SkyMall’s cash, cash equivalents, and marketable securities. We also retained approximately $4 million of liability.

Now turning to our cable and satellite segment: Total revenues in 2005 were $271.8 million, up nearly 18% over 2004. This increase came primarily from three sources — a $24.3 million increase in TV Guide Interactive licensing revenue, a $9.9 million increase in TV Guide Channel Advertising revenue, primarily from CPM increases in both commercial and national advertising, and a $12.6 million increase from TVG Network as a result of increased wagering revenues. Adjusted EBITDA for the cable and satellite segment in 2005 was up 10.7%, increasing to $108.4 million. The increase was largely due to the increases in revenue I just mentioned, partially offset by increases of $14.1 million in programming, marketing, and compensation expenses of the TV Guide Channel, $5.7 million in expenses for TV Guide Spot, and approximately $5 million of operating expenses related to Guideworks.

With respect to affiliate relationships, 2005 was a good year for both our cable and satellite networks as well as our Interactive Program Guide business. We signed renewed distribution agreements with a number of a systems during 2005 and in early 2006, including agreements with Adelphia for our IPG, TV Guide Channel, TVG Network, and TV Guide Spot, with Cablevision for TVG Network, with ___ for our IPG, with Media Contour IPG, and as we announced in January with Cox Communication for our IPG, TV Guide Channel, TVG Network, and TV Guide Spot.

I just mentioned earlier, our TV Guide Channel programming is beginning to resonate with both viewers and advertisers. With regard to our 2006 programming plan, we believe that we can increase both viewership and advertising revenue and better position the channel for digital viewers in the long term. As such, for 2006, we anticipate that our total programming expenses for TV Guide Channel will increase by approximately 25% over the 2005 level. For TV Guide Interactive, our revenues in 2005 increased by almost 29% or $21.4 million. This was primarily due to a 36% increase in licensing revenue from cable and satellite subscribers that receive either our IPG or another party’s IPG, which is provided to them under a patent license between us and the service provider.

In the 4th Quarter, we added 1.6 million such digital households and ended 2005 with 39.4 million digital households. Regarding the potential timing of Interactive Program Guide licensing revenues related to the Cox agreement I mentioned a moment ago, we anticipate that once we complete the development and field testing of a new OCAP-compatible IPG, we will begin to see the addition of several million new digital homes to our customer base, beginning most likely in the second half of 2007.

As Rich mentioned previously, TVG had a strong 2005. Our basis of active wagering accounts in 2005 as well as a total number of wagers, the average wager per active account, the average wager size, all increased in 2005. As a result, our handle grew 31% over 2004 to $396.9 million, an all time high for TVG Network.

Now turning to our Consumer Electronic Licensing segment: For 2005 the segment generated revenue of $94.5 million. Revenue for the full year decreased $23.1 million or 19.6% from revenue of $117.5 million in 2004, which incidentally included $19.4 million in settlement from that year. Our VCR Plus revenues decreased year over year by $9.2 million due to a reduction in recorded unit volumes. For the full year 2005, adjusted EBITDA for the CE licensing segment was $40.2 million compared with adjusted EBITDA of $42.6 million in 2004. The 2005 adjusted EBITDA was impacted by the reduction revenues I mentioned and $2.5 million in severance expenses offset by a $26.5 million decrease in legal expenses, primarily due to the settlement of legal matters with Scientific-Atlanta.

Looking in more detail at our CE IPG, which is branded TV Guide OnScreen in the US, it’s branded Guide Plus in Europe, and G-GUIDE in Japan, this technology is incorporated predominantly in mid-to-high end plasma, DLP, and LCD televisions and DVD recorder products. Revenues for our worldwide CE IPG business in 2005 was $43.1 million, a decrease of $5.7 million from 2004. However, excluding the $14 million of settlements which occurred in 2004 but not in 2005, our per unit shipped revenue actually increased by $7.9 million or 48.5% as compared to the same period in the prior year. This came primarily from the growing number of CE products primarily shipped in Japan and Europe, which incorporated our IPG technology. Also contributing to the increase in the CE IPG revenue was the Scientific-Atlanta set-top box shipments, which we recognized for the first time in the 4th Quarter.

Lastly, CE IPG revenue also included the continued amortization of up-front payments received under long-term pattern licenses, $17.1 million for each of the years ended December 31, 2005 and 2004. Taking a closer look at the geographic breakdown of our CE IPG business, Japan is strongest with 237 deployments of our IPG. We anticipate this strength to continue in 2006. In 2005, of the 88 new IPG incorporations we have there, 35% were into television sets and we expect this trend to continue in 2006 as the number of TV products incorporating our IPG grows. At the same time, our G-GUIDE IPG, which is what it’s called in Japan, has become a standard feature for digital recorders for the hard drive. Although on a relatively smaller scale than Japan, we also believe IPG revenues will grown in Europe in 2006 where the number of product launches in 2005 reached 21, mostly driven by digital recording devices introduced by Sony and JVC. At the end of 2005, we had a total of 28 products deployed in Europe and in 2006 we anticipate broader incorporation of our IPG from other licensees.

As we said in our last call, the North American IPG market is dominant by DBS and MSO provided IPGs. Our market for CE IPG is now driven primarily by adoption in television sets as opposed to digital recorders. At present, we have 123 products with our CE IPG with most in the high-end flat panel TVs. In fact, of the 89 new products incorporating our IPG in 2005, 79 were in mid-to-higher end televisions. We expect to see this mix begin to change in 2007 as we focus on developing strategies to drive incorporation of our IPG into more mid-range TVs. While we believe in the long-term prospects of North American CE IPG market, the low take up rate for cable cards and the prevalence of alternative IPGs generally licensed by us and recognized in the cable and satellite segments, ...